Article by Laura Walshe of The Business Debt Advisor
One of the advantages of operating a limited company is that a Director can draw remuneration in a number of ways.
For instance, it is common for Directors to take basic salary and dividends.
This is usually a tax efficient method of receiving remuneration and entirely legitimate. However, the timing of dividend payments must be carefully considered as the recipient could be exposed, if the dividend is later found to be unlawful.
When can a company pay dividends?
The Companies Act 2006 sets out the rules on payment of dividends.
Dividends can only be made out of distributable reserves and the decision to pay a dividend must be with reference to relevant accounts.
These are usually the latest annual accounts (as circulated to shareholders), or if those accounts don’t show enough distributable profits to support the dividend, then with reference to ‘interim accounts’ in support.
Other conditions must also be met before a dividend payment is deemed lawful:
- A Board Meeting should be held to consider the level of distributable profits available, and to declare the dividend. These minutes may prove invaluable if questions are subsequently raised about the legality of the distribution.
- A dividend voucher should be issued to the recipients. Effectively this is a receipt, which the recipient should retain for their own tax purposes.
Repayment of an Unlawful Dividend – who is liable?
The recipient of an unlawful dividend can be required to repay it.
If a recipient can demonstrate that they were genuinely unaware the company could not support the payment at the time of issue, the liability passes to the company directors who sanctioned the payment.
Unlawful Dividends and Insolvency
In cases where a company enters into a formal insolvency process, the risk to Directors of repayment increases considerably.
A common example is where a company enters liquidation. Part of a Liquidator’s duty is to review the events prior to insolvency, and any distributions made. A recent decision in the Court of Appeal has clarified when a dividend payment will be considered to be unlawful.
In Global Corporate Ltd v Dirk Stefan Hale  EWCA the Liquidator identified unlawful dividends and pursued repayment. Mr Hale (the Director) argued that at the end of each financial year the dividend payment would be reversed if it appeared there were insufficient distributable reserves.
The decision clarified that a payment cannot be treated as dividend, and characterised as something else at a later date. Additionally, the ruling clarified that the director having provided services to the company, and his belief that he should be recompensed for those services, was not a defence.
If you have any concerns about your exposure to risk then please fill out our Contact Form and we will be in touch. Our team has extensive experience and can arrange an initial consultation at no cost, usually on the same day.
Taking steps to wind up your company does need careful consideration. Call our team on 0333 9999 689 or email us at firstname.lastname@example.org.
The Business Debt Advisor is a trading division of The Debt Advisor Ltd which is authorised and regulated by The Financial Conduct Authority number 659920. Beverley Budsworth is the MD and is also an Insolvency Practitioner regulated by The Insolvency Practitioners Association.