Companies Act 2006, section 851

Application of rules of law restricting distributions

Part 23 Distributions

(1)Except as provided in this section, the provisions of this Part are without prejudice to any rule of law restricting the sums out of which, or the cases in which, a distribution may be made.

(2)For the purposes of any rule of law requiring distributions to be paid out of profits or restricting the return of capital to members—

(a)section 845 (distributions in kind: determination of amount) applies to determine the amount of any distribution or return of capital consisting of or including, or treated as arising in consequence of the sale, transfer or other disposition by a company of a non-cash asset; and

(b)section 846 (distributions in kind: treatment of unrealised profits) applies as it applies for the purposes of this Part.

(3)In this section references to distributions are to amounts regarded as distributions for the purposes of any such rule of law as is referred to in subsection (1).

Read section 851 in the full Act → Definitions (5) Cases (6)

Definitions used in section 851

distribution

(1) In this Part “distribution” means every description of distribution of a company's assets to its members, whether in cash or otherwise, subject to the following exceptions.

Defined in s.829(1) · see it in the full Act
profits

(a)are to profits or losses of that description made at any time, and

Defined in s.853(2) · see it in the full Act
member

(2) In sub-paragraph (1) “member” has the same meaning as it has by virtue of section 7(1) of that Act .

Defined in Sch.2 Pt.1 · see it in the full Act
company

“company” means a company formed and registered under this Act, that is—

(a)

a company so formed and registered after the commencement of this Part, or

(b)

a company that immediately before the commencement of this Part—

(i)

was formed and registered under the Companies Act 1985 (c. 6) or the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)), or

(ii)

was an existing company for the purposes of that Act or that Order,

(which is to be treated on commencement as if formed and registered under this Act).

Defined in s.1(1) · see it in the full Act

(4) In this section and that Schedule “company” includes any body corporate.

Defined in s.1159(4) · see it in the full Act
non-cash asset

(1) In the Companies Acts “non-cash asset” means any property or interest in property, other than cash.

Defined in s.1163(1) · see it in the full Act

Cases considering section 851 (6)

BTI 2014 LLC v Sequana SA and others

[2022] UKSC 25 · 5 October 2022Limits

Part 23 operates without prejudice to other rules restricting distributions. A dividend satisfying Part 23 can therefore still breach the creditor-interest rule or another applicable rule of law (see paras [160]-[162]; [337]-[342]).

Henderson and Jones Limited v David Jason Ross & Ors.

[2023] EWHC 1276 (Ch) · 26 May 2023

The court recognised that Part 23 operates without prejudice to other legal rules restricting distributions, including the common-law rule against return of capital. (see paras [391]; [416]-[421]) The court recognised that sections 845 and 846 also apply to common-law restrictions on distributions and returns of capital. (see paras [391]; [549]-[550])

Baker (Liquidator of TMG Brokers Limited) v Staines & Anor

[2021] EWHC 1006 (Ch) · 23 April 2021

Confirms that the common-law prohibition on distributions from capital remains effective alongside Part 23. The payments were treated as unlawful distributions of capital.

What each judgment says about section 851 is in the case-law panel in the full Act.

Explanatory note

1158.This section is a new provision which preserves the existing common law rules on unlawful distributions (see subsection (1) ) – which continue to be an essential component in determining what amounts to an unlawful distribution.

1159.Subsection (2) makes an exception to this: in particular, it provides that the lawfulness and amount of distributions in kind are established by the statutory rules in sections 845 and 846 and not by any applicable common law rules.

All the explanatory notes for the Act

Amendments and notes

1 notes from legislation.gov.uk

Commencement

  1. I310S. 851 wholly in force at 6.4.2008; s. 851 not in force at Royal Assent see s. 1300; s. 851 in force at 6.4.2008 by S.I. 2007/3495, art. 3(1)(k) (with savings in arts. 7, 12 and subject to transitional adaptations in Sch. 1 paras. 14-20 and with savings in Sch. 4 paras. 33-35) this amendment is subject to savings and/or transitional provisions, see the commentary.