Unjust Enrichment, Trusts and Recipient Liability for Unlawful Dividends

The law relating to unlawful dividends in the UK is reasonably clear. Companies legislation explains what amounts to an unlawful dividend. The common law provides that directors and other officers who are responsible for the making of an unlawful dividend are liable to compensate the company for the full extent of its loss as a result of that payment. Statute states that a recipient who knows or has reasonable cause to believe that the payment is unlawful, is liable to repay it. Legislation, in addition, specifically preserves the pre-existing common law provisions, which likewise presently provide that a recipient is only liable to repay if they have knowledge that the payment is unlawful. It is the liability of the recipient which is examined in this article. The requirement of knowledge in this context has meant that dividends are only likely to be recovered from parent companies and those within the management of the company. This seems overly narrow. Although the shareholders may not have compelled payment, and may have no knowledge of its unlawfulness, they have nevertheless received a windfall for which they have given no consideration and which the company had no power to pay. This article suggests that unlawfully paid dividends should potentially be recoverable from all recipients, on the basis of unjust enrichment. This would mean that the defence of lack of knowledge would be lost to recipients, although the defence of change of position would be available.