Court clarifies when “backdated” distribution was in fact made

The High Court has held that a distribution that had been “backdated” to July 2015 had in fact been made a year later.

In Manolete Partners plc v Rutter and Rutter [2022] EWHC 2552 (Ch), the directors and sole shareholders of a company decided to pay themselves a dividend and to set that dividend off against the loans they owed to the company. The result was that no money would transfer and, instead, the directors’ loan accounts would be reduced.

The directors wished to “backdate” the dividend so that it would be effective as from July 2015. The company’s bookkeeper entered the dividend into the company’s accounting system on 12 April 2017 as part of year-end adjustments, reflecting that the dividend was made in July 2015.

The company subsequently entered administration and the question arose whether the dividend was made in July 2015, July 2016 or April 2017. This would determine whether the dividend was lawful.

The court found that the dividend had been paid when there had been some “positive action which affects the company’s finances in some definite way”. This happened in July 2016, as it was then that the directors reached their decision to pay the dividend and the transaction was recorded in the company’s accounts (albeit for the company’s 2014/2015 financial year).

As a result, the court found that the dividend was lawful.

The decision shows the importance of carefully documenting the decision to pay a dividend and its subsequent payment. For more details of the case, you can read our separate in-depth piece.