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What happens if a company pays dividends it cannot afford?

Posted on Friday, 18th March 2016 by

5858030702_91d59088f1_oDepending on the success of a company, a dividend allows for a regular payment to be made to shareholders from its distributable profits. Distributable profits are calculated from a company’s accumulated, realised profits so far as they have not previously been used elsewhere.

A company’s articles of association will usually set out the process to pay dividends. For example, model articles require a dividend to be declared by shareholders following a recommendation of the amount from the directors.

If a payment is declared in excess of the distributable profits of the company, for example if proper tax provisions had been made the amount would not be available, the dividend is deemed unlawful.

The Companies Act 2006 (CA 2006) does not impose criminal penalties for the distribution of illegal dividends, but it could lead to a HMRC investigation, penalties and further fines.

Shareholders will be liable to repay the amount if they knew or had reasonable grounds to believe that the payment of the dividend was being made in contravention of s.847 of the CA 2006.

This does not absolve liability for directors. If a director participates in the payment of an unlawful dividend, they can be found in breach of their statutory duty in s.174 of the CA 2006, to exercise reasonable care, skill and diligence. A lack of knowledge or awareness is not a defence, and may result in the directors being personally liable for the amount of the unlawful dividend.

Directors and shareholders should also be aware that liquidators or administrators can review the conduct of the directors three years prior to the company becoming insolvent, and may pursue repayment of the unlawful dividend on the ground it was paid as a preference under s.175 of the Insolvency Act 1986.

To talk to a specialist about a matter related to this blog please do not hesitate to get in touch with our business law team in Leicester

The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer.  If you are interested in obtaining advice, please contact one of our solicitors who will be happy and able to advise you on your own particular circumstances.

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The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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