4.4.5.4.5 Excessive remuneration and non-payment of dividends

The category of excessive remuneration accounts for 11.5 per cent in the survey, and the failure to pay adequate dividends amounts to 25 per cent.1 It is noted that there is often a link between excessive remuneration and the failure to distribute reasonable dividends in a close company because the corporate profits are usually and mainly distributed through remuneration, while dividends are no longer paid to shareholders.2

The amount of remuneration to be set is at the board's discretion.3 But what amount is appropriate? In case law under s. 459, the established principle is that the amount must be proportionate and cannot be so large as to affect the distribution of dividend 4 But again, it remains a problem to decide the standard for an "amount in proportion". How does one measure whether the proportion is reasonable or not? A few options have been proposed: in proportion to profits, in proportion to contribution in management or analogy to similar positions in comparable businesses.

In Re a company, the petitioner made three allegations, namely, excessive remuneration, wrongful diversion of company business and attempt to reduce the petitioner's proportional stake in the company, all of which were successful.5 The court agreed that remuneration paid to the respondent "was plainly in excess of anything that he had eamed and was so large as to be unfairly prejudicial to the petitioner's interests." In this case, in deciding whether the amount of remuneration was in proportion, the court took the respondent's contribution to the company as a criterion. Later cases also showed that remuneration and bonus should be justified in proportion to the management duties .6 In a recent case, the idea of "objective commercial criteria" was brought up, which meant an appropriate level of remuneration was "within the bracket that executives carrying that soit of responsibility and discharging the soit of duties would expect to receive"7 The foundation is therefore the average pay of one's counterparts in a similar position, and the reasonable amount fluctuates along this average line, depending on one's actual contributions.

The court reviews the category of allegations of no or linie dividend distribution with great caution because it is a matter of management decisions subject to business judgement. It is clear now that courts have jurisdiction onder s. 994 if the failure to pay dividends affects the members' interests.8 In Re Sam Weller & Sons Ltd, though the company had accumulated a substantial amount of profits and cash in hand, over many years the company pursued a low dividend payment policy without any increase.9 Peter Gibson J marked these facts as "striking" and said that he saw no sufficient reason why payment of low dividends in such circumstances is incapable of amounting to conduct unfairly prejudicial to the interests of those members like the petitioners, who did not receive directors' fees or remuneration from the company.10 So far, regarding a close company, the courts have taken a very cautious and restrictive position on interfering in dividend distribution, just as they do on mismanagement. Only "serious" or striking facts entitle petitioners to relief. It is also difficult for the courts to decide. In Chapter 5, it will be interesting to see that Chinese company law does not favour such an abstract standard as "striking" and changes the abstract wording into a specific index of numbers.11