Court of Cassation: Loan Obligations Take Priority Over Dividend Distributions in Times of Financial Distress
Alkhateeb: A Victory for Sound Corporate Governance Principles
In a landmark ruling, the First Commercial Circuit of the Kuwaiti Court of Cassation affirmed that decisions regarding the distribution of company profits fall squarely within the discretionary powers of a company’s board of directors—particularly in cases of financial distress.
The ruling came in response to a lawsuit filed by a group of shareholders demanding cash dividend distributions based on prior-year profits totaling over KD 15 million. The court dismissed the case on the basis that the absence of a board resolution authorizing the distribution and the company’s presentation of substantiated financial justifications were sufficient to deny the claim.
The court also found that the defendant company had been undergoing a period of financial hardship resulting from significant loan obligations. It ruled that the company’s legal obligation to meet debt service and contractual liabilities to lending institutions—under clearly defined financing terms—must take precedence over any discretionary dividend payouts. The financing agreements in question explicitly stated that no dividends could be distributed before full debt servicing was achieved.
In the case, the expert accountant confirmed that the auditor was unable to verify the shareholder's entitlement to dividends due to the unavailability of financial documents, the absence of a board resolution, and the lack of general assembly approval authorizing disbursement.
Commenting on the ruling, Dr. Fawaz Khaled Alkhateeb, the company’s legal counsel, described the judgment as “a triumph for corporate governance principles.” He emphasized that a company must not distribute profits while under financial strain or facing ongoing liabilities—particularly in the presence of outstanding debt or binding funding conditions.
Dr. Alkhateeb also highlighted that the judgment reinforces the pivotal role of boards of directors in shaping responsible financial policies that protect both the company's continuity and the balance between shareholder interests and obligations toward lenders, regulators, and other stakeholders.