2017 has seen press statements from a number of high profile companies that dividends to shareholders have been paid in breach of the Companies Act requirements.
The payment of dividends by a Company is subject to strict statutory rules. Dividends can only be paid to shareholders out of distributable profits, namely its “accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less it’s accumulated, realised losses, so far as not previously written off in a reduction or re-organisation of capital duly made.”
Any dividend has to be justified by reference to relevant accounts. ‘Relevant accounts’ are either the company’s last annual accounts or, where those accounts do not show that there are sufficient distributable profits to cover the dividend, the payment may be justified by reference to interim accounts. Where interim accounts are relied upon they must contain sufficient information to enable a reasonable judgment to be made of the profits available for distribution. For PLCs, these interim accounts must be filed at Companies House before the dividend is paid.
Dividends which are not paid in strict accordance with the regulations will be unlawful.
Paying an unlawful dividend can have consequences for both the directors of the Company and the shareholders.
Directors have statutory and common law duties. One such duty is to exercise reasonable care, skill and diligence. The payment of an unlawful dividend would be a breach of these duties. Accordingly, any director who has authorised the payment of an unlawful dividend may be liable to compensate the Company for the amount of the dividend.
Likewise, shareholders can be required to repay the amount received if they knew, or ought to have known, that there were not distributable profits available to fund the dividend. This is likely in an owner-managed business.
It is vital that directors seek early advice if they believe that they may have paid an unlawful dividend to shareholders to ascertain to what extent the risk can be mitigated.
If the Company was to subsequently suffer financial difficulties and enter into an insolvency process the appointed office holder would look to pursue any unlawful dividends paid prior to insolvency and would also look at any potential misfeasance claims against the directors for breaching their fiduciary duty.
If your Company is in financial difficulty and you are concerned that an unlawful dividend may have been declared please contact one of our experienced team for a free of charge consultation. Contact us.