The Supreme Court has dismissed an £80,000 claim by Igote Limited after finding that annual payments provided for in a 1991 share subscription agreement were dividends rather than a fixed debt payable regardless of profits.
Igote claimed £40,000 for the financial year ending March 1997 and another £40,000 for the following year from Badsey Limited. The dispute centred on clause 4.3 of an agreement dated 27 July 1991 involving Igote, Bagrave Limited and Badsey.
That clause provided that the company would distribute at least £40,000 in a 12-month financial period to Igote as the first subscriber, followed by a similar amount to the second subscriber. Any excess dividend was then to be divided according to shareholdings.
Igote argued that the £40,000 was a contractual payment which had to be made annually regardless of whether profits were available. Badsey maintained that the payments were dividends and therefore could only lawfully be made from distributable profits.
The High Court accepted Igote’s interpretation in July 2000. Evidence had been heard about the commercial background, earlier patent arrangements and negotiations leading to the agreement.
Mr Justice Murphy held that the High Court had gone too far in using evidence of negotiations and the parties’ subjective intentions to interpret the final contract. The court’s task was to establish the meaning of the words the parties actually used, read in their proper commercial context.
The Supreme Court placed particular weight on the agreement’s repeated use of dividend terminology. Clause 4.3 referred to dividend waivers and contemplated the payments being made by interim dividends. Another provision dealing expressly with the company’s dividend policy was also made subject to clause 4.3.
The court therefore concluded that the £40,000 annual amounts were dividends. They were payable only when sufficient profits lawfully existed for distribution.
As Badsey had no distributable profits for 1997 and 1998, the Supreme Court allowed its appeal, set aside the High Court order and dismissed Igote’s claim.