ABSTRACT
The chapter is concerned with distributions that are made by directors and where they would be a diminution of capital. Distributions are unlawful unless they comply with Part 23 of the Companies Act 2006. Distributions are not to be made out of the capital of the company, even to shareholders, unless the provisions of the Act are followed, with the provisions existing to protect creditors. The chapter explains that ‘distribution’ is interpreted broadly as well as the distributions that may be made and who might be liable where unlawful distributions are granted and what relief from liability might be available. While the liability of others is mentioned, the focus is on the liability of directors when making unlawful distributions. Directors approving of an unlawful distribution may be liable at common law. They will be liable if they had actual knowledge of the fact that there were insufficient profits for a valid distribution or they ought to have known that this state of affairs existed, based on a reasonably diligent director test. The chapter also notes that distributions might also constitute a breach of the obligation of directors to consider the interests of the creditors.
