0370 270 6000

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.

Training and events

5Oct

Private Sector Development Club Nottingham office

Our next Private Sector Development Club will be a breakfast seminar taking place on Wednesday 5 October 2022.

View event

5Oct

Automotive webinar - EV charging points: contractual and liability issues to be aware of ON24 Webinar

This webinar will look at some practical contractual and liability issues involved in installing, owning, operating, and maintaining electric vehicle charge points.

View event

Focus on...

Blogs

IR35 rules to be scrapped from April 2023

The Chancellor’s recent mini-budget provided a significant announcement for business as it was confirmed that the off-payroll working rules (known as “IR35”) put in place for public and private sector businesses from 2017 and 2021 will be scrapped from April 2023.

View

Press releases

Browne Jacobson announces 10 to its 2022 trainee solicitor scheme

Browne Jacobson has welcomed 10 future lawyers to its trainee scheme for 2022 – 2024 as it continues to grow its business.
The new recruits have joined 36 trainees currently at the firm, bringing the total number of trainee solicitors at Browne Jacobson to 46 – a record number for the firm.

View

Press releases

Browne Jacobson strengthens its UK&I commercial practice with hire of new retail & consumer specialist partner

Browne Jacobson has bolstered its commercial practice in the UK with the appointment of commercial contracts and international trade specialist, Emma Roake, into its City-based London team.

View

Press releases

Browne Jacobson’s Private Equity specialists advise Palatine on key CTS exit

Browne Jacobson’s national private equity (PE) lawyers have advised leading mid-market PE investment firm, Palatine Private Equity (Palatine) on its exit from CTS Group, the fast-growing specialist in testing, inspection and geoengineering consulting services to the construction and infrastructure sectors.

View

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.

Mailing list sign up

Select which mailings you would like to receive from us.

Sign up