The controversial “It’s a Wrap” ruling has been reversed in the Court of Appeal. The case dealt with a company which became insolvent. The directors had taken dividends rather than salaries as is often the case as to do so allows savings of National Insurance contributions. However, company law prohibits the payment of a dividend if there are not sufficient ‘distributable profits’.
In this case, there were insufficient distributable profits and as a result the dividend payments were in breach of the applicable law. The liquidators sought repayment of the overpaid dividends. A lower court ruled, somewhat surprisingly, that the overpaid dividends were not repayable because the director/shareholders who took the dividends were not aware they were unlawful.
The Court of Appeal has now restored the former position. Directors can once again not rely on the excuse that ‘they didn’t know there was anything wrong’ to avoid liability in similar cases.