The FT reports this morning that:
Fund supermarket Hargreaves Lansdown has broken UK company law on dividend payments to shareholders, who include founders Peter Hargreaves and Stephen Lansdown.
The FTSE-100 listed broker admitted on Wednesday that it was “technically” in breach of the Companies Act because it had failed to file accounts justifying its dividend payments.
They're not alone: other companies including Next have done this recently. No doubt others will follow in their path. And there's good reason for that. It's because for all practical purposes no one enforces company law in the UK. It could be argued that the Department for Business, Energy & Industrial Strategy should, but it does not. Partly because that's because there is almost no one left there. And partly it's because they pass the buck to Companies House. But Companies House is quite certain it is not a regulator; it says it is only a registrar. And other possible agencies, who do in any event have only very limited scope, such as the FCA, let such matters be swept under the carpet by retrospective action (as will happen here) or a mild wrap on the knuckles.
And s0 400,000 companies a year do not comply with their most basic company law obligations.
And large companies treat the law with indifference.
And there is a cost: I estimate it may be £16 billion in lost tax a year.
And yet it is apparently too onerous and too much red tape to enforce the law.
To which I say utter nonsense: the failure to enforce company law is a conspiracy against honesty that costs us all a fortune.
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I can see reasons why the Conservatives would not wish to enforce Company Law – idealogy and self-interest. Fewer public servants asking awkward questions. But why haven’t previous Labour governments tacked this, given the cost to the public purse of not doing so? Can anybody enlighten me?
I am utterly baffled
Apparently New Labour was ‘intensely relaxed’ about people making money. Maybe this was a symptom of that?
What action would you have DBEIS or Companies House take against a company which has paid an unlawful dividend? (remembering of course that “unlawful” here means just “not in accordance with the requirement to have enough distributable reserves” not “criminal”)
Section 847 of the Companies Act 2006 sets out the “consequences of unlawful distribution”. Where a shareholder knew or had reasonable grounds to believe the dividend was unlawful a shareholder is liable to repay it. The more draconian remedy comes from the common law, which treats the directors as being in breach of duty and can require them to repay the dividend (even when they didn’t receive it). For a notorious example, see Queens Moat Houses: http://www.bailii.org/ew/cases/EWCA/Civ/2001/712.html
Believe me, few directors are willing to run that sort of risk. In this case, I expect this was a cock up by the accountants or the lawyers, rather than nefarious behavior. Assuming all is well, and the company remains solvent, the default can be rectified and the rectification can be ratified by the shareholders. So who loses out?
This was not a one off
The The Local Authority Pension Fund Forum is drawing attention to these breaches time after time
It’s systemic at the rate they have to do so
NB I advise the The Local Authority Pension Fund Forum