Guernsey Company Law Series: Dividends and Distributions to Shareholders

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KEY TAKEAWAYS

Distributions can be made from a wide range of sources and there is no requirement to maintain an authorised share capital

A statutory solvency test must be satisfied and a statutory procedure followed when paying a dividend or authorising a distribution otherwise the directors maybe personally liable to repay unrecoverable amounts

This guide sets out the difference between distributions and dividends, the requirements of each procedure and the effect of not meeting those requirements

The Companies (Guernsey) Law 2008, as amended (the "Law"), gives Guernsey companies a considerable degree of flexibility to make distributions from a wide range of sources.

There is no requirement for a Guernsey company to maintain an authorised share capital.

In this briefing, we outline the Guernsey law specific nuances in relation to distributions and dividends, which are separate concepts under the Law, but overall have similar procedures. We also highlight the potential personal liability that directors face in certain instances.

What is a distribution?

The Law defines a "distribution" as a distribution by a company to a member, by way of:

a direct or indirect transfer of money or property, other than the company's own shares, to or for the benefit of the member; or

the incurring of a debt to or for the benefit of the member.

What is a dividend?

The Law defines a "dividend" as a distribution of any company's assets (ie money or other property) to its members. The Law adopts the approach that every distribution by a company to its members will be deemed to be a dividend unless it is expressly listed as an exclusion in the Law. The exclusions are:

an issue of shares as fully or partly paid bonus shares;

a redemption or acquisition of any of the company's own shares or financial assistance for an acquisition of the company's own shares;

a reduction of share capital;

a distribution of assets to members during and for the purposes of its winding-up;

a distribution of assets to members during and for the purposes of an administration order;

a distribution of assets to members of a cell of a protected cell company during and for the purposes of a receivership order; or

a distribution of assets to members of a cell of a protected cell company during and for the purposes of the termination of the cell.

A dividend may be of such amount, paid at such time and be paid to such members, as a company's board of directors (the "Board") thinks fit.

The Board must not authorise a dividend:

in respect of some but not all the shares in a class; or

that is of a greater value per share in respect of some shares of a class than it is in respect of other shares of that class,

unless the amount of the dividend in respect of a share of that class is in proportion to the amount paid to the company in satisfaction of the liability of the shareholder under the memorandum and articles of the company or under the terms of issue of the share.

Notwithstanding the above, a member may waive their entitlement to receive a dividend by notice in writing to the company signed by or on behalf of the member.

How to pay a dividend or authorise a distribution under the Law

The Board may authorise a distribution, or pay a dividend, if:

it is satisfied on reasonable grounds that the company will, immediately after the distribution, or payment of the dividend as the case may be, satisfy the statutory solvency test; and

it satisfies any other requirement in its memorandum and articles.

In order to show that the solvency test was considered and met, the Board must approve a certificate stating:

that in their opinion the company will, immediately after the distribution or payment of the dividend, satisfy the solvency test, and

the grounds for that opinion,

and the certificate must be signed on their behalf by at least one member of the Board.

If, after a distribution or dividend is authorised and before it is made, the Board ceases to be satisfied on reasonable grounds that the company will, immediately after it is made, satisfy the solvency test, any distribution made or dividend paid by the company is deemed not to have been authorised.

Whilst the definition of distribution is wider than that of a dividend, the procedures for their authorisation are broadly similar. If a company cannot be shown to pass the solvency test immediately after making the distribution or declaring a dividend, then it is not lawful under the Law.

Meaning of 'solvency test'

The statutory solvency test looks at cash flow and balance sheet solvency. The Board will need to consider whether if it were to make the distribution / dividend, immediately afterwards:

the company is able to pay its debts as they become due;

the value of the company's assets is greater than the value of its liabilities; and

in the case of a GFSC regulated company, the company satisfies any other requirements as to solvency imposed on it under certain regulatory laws.

There is no requirement under the Law that the company remain solvent for a set period after the making of the distribution / dividend, although it is generally accepted that a company should look forward on at least a 12 month basis.

Recovery of dividends or distributions if the solvency test is not met

If a dividend or distribution is made to a member at a time when the company did not, immediately after the distribution, satisfy the solvency test, such dividend or distribution may be recovered by the company from the member within a period of two years beginning immediately after the day on which the dividend or distribution was made.

This recovery from members is however not permissible in instances where:

the member received the dividend or distribution in good faith and without knowledge of the company's failure to satisfy the solvency test;

the member has altered their position in reliance on the validity of the dividend or distribution; and

it would be unfair to require repayment of the dividend or distribution in full or at all.

Personal liability of directors

A director who failed to take reasonable steps to ensure that the procedures described above were followed, or who voted to approve a solvency certificate when reasonable grounds for believing that the company would satisfy the solvency test did not exist, will be personally liable to the company to repay the difference between the dividend or distribution made and the amount recoverable from the relevant member(s).

Further, if a dividend or distribution is deemed not to have been authorised, a director who:

ceased after authorisation but before the making of the dividend or distribution to be satisfied on reasonable grounds for believing that the company would satisfy the solvency test immediately after the dividend or distribution is made; and

failed to take reasonable steps to prevent the dividend or distribution being made,

will be personally liable to the company to repay to the company so much of the dividend or distribution as is not able to be recovered from members.

It is therefore important for the directors of a company to take the necessary time to consider to the solvency position of the company before authorising a dividend or distribution.

Dividends or distributions under a company's articles of incorporation

In addition to the statutory requirements under the Law, a company's articles of incorporation may also contain bespoke provisions regarding the payment of a dividend or distribution. The directors should be aware of these as they may include restrictions, preferences and / or more comprehensive procedural.