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Dividends – are they lawful?

5 October 2017

There is no new law in this area, however, in light of some recent inadvertent unlawful dividends, it is worth a reminder that legal requirements for the payment of dividends set out in the Companies Act 2006 need to be strictly complied with.

A technical infringement in the current or in prior financial years may be picked up by a company’s auditors and will then need to be resolved in order to avoid a qualification to the company’s accounts.

Resolution can be complicated and incomplete. If the payment of an unlawful dividend has occurred in prior financial years, the accounts of the prior year may need to be restated. How can payments be rectified if the company’s shareholder base has changed significantly since the date unlawful dividends were paid? If unlawful dividends were paid in a prior tax year, what will be the tax impact on a company’s shareholders if payments need to be returned and then a new dividend declared in a different financial year? Shareholder approval for rectification of unlawful dividends will also be needed, which will require a circular, general meeting and a detailed explanation.

The following are some common situations to watch out for which may result in an unlawful dividend:

  1. interim accounts are not prepared and the last annual accounts show insufficient distributable reserves to cover the dividends paid
  2. a parent company declares and pays a distribution when the requisite profits have not been received and recorded by way of proper dividends from its subsidiaries
  3. interim accounts that have been prepared in respect of an interim dividend but have not been filed with the Registrar of Companies.

As always, prevention is better than cure and companies (particularly those which pay interim dividends during the financial year) should check their internal procedures and work with their advisers to ensure requisite steps are taken to ensure dividend payments are compliant with law.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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