Entrepreneurs often pay themselves modest salaries, topping up their incomes with dividends, but how do such arrangements impact on loss of earnings claims arising in personal injury cases? The Court of Appeal addressed that issue in the case of a successful businessman who died from asbestos-related cancer.
The man was exposed to asbestos at work when he was a young man in the 1970s and 1980s. He was in his early 60s when he died from mesothelioma, a form of lung cancer almost invariably associated with asbestos. Prior to his death, he launched proceedings against his employer at the time of exposure and was awarded a six-figure sum in damages by a judge. However, his claim in respect of future loss of earnings, which had been valued at over £4.4 million, was rejected.
In the years prior to his illness, he had built from scratch a thriving ventilation and heating company in which his wife and sons also worked. Although he was the driving force behind the business, he took a relatively small salary and most of his income came in the form of dividends. He asserted that, but for his illness, he would have carried on working in the business well beyond retirement age.
In assessing the value of his loss of future earnings claim at nil, however, the judge found that, given the competent performance of his sons, the profitability of the business was unlikely to be diminished by his death. His shares in the company would pass to his family when he died and there would therefore be no loss of dividend income. His salary was exceeded by his personal living expenses, which would cease to be incurred after his death.
Upholding his widow’s appeal against that outcome, the Court ruled that it was entirely contrary to principle to view his salary, which had been kept at a modest level for reasons of tax efficiency, as a true reflection of the value of his work for the company. It also made no sense to regard his dividends as income from a capital investment rather than earnings from work.
His entire income from the company was the product of his hard work and business flair and his dividends could not be seen merely as a return on a passive investment. A further hearing was directed at which the damages payable in respect of his future loss of earnings would be reassessed in the light of the Court’s decision.
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