What is a dividend?

A dividend is a distribution of a company’s post-tax profits to its shareholders. For a company to be able to pay this lawfully, it must have sufficient distributable profits that are justified by reference to “relevant accounts”. 

What are distributable profits?

The Companies Act 2006 sets out what distributable profits, or distributable reserves, are:
“accumulated, realised profits, so far as not previously utilised by distributional capitalisation, unless it is accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.” 

What does “relevant accounts” mean?

“Relevant accounts” can be a company’s annual accounts, or if the annual accounts do not show sufficient distributable reserves, a set of interim accounts. This enables a reasonable judgement to be made in respect of the amounts of the items mentioned in section 836(1) of the Companies Act 2006: 

• The company’s profits, losses, assets and liabilities
• Relevant provisions, and
• The company’s share capital and reserves

The payment of dividends

A dividend will either be final or interim. The dividend may be a normal dividend paid occasionally during the company’s financial year, a pre-sale dividend, or a fixed dividend that is paid to the holders of preference shares.

A company’s articles of association will often include requirements relating to payments of this kind. Typically, a company’s articles of association will provide that:

• While the directors can recommend a final dividend, the shareholders must declare the dividend by ordinary resolution;
• The shareholders cannot vote to pay themselves a final dividend in excess of the amount that the directors have recommended, but can decide on a smaller amount; and
• The directors can resolve to pay interim dividends.

Directors’ common-law and statutory duties

Directors must have regard to their common-law duties and statutory duties under the Companies Act 2006. Particularly:

• Section 171 (duty to act within powers)
• Section 172 (duty to promote the success of the company) and; 
• Section 174 (duty to exercise reasonable care, skill and diligence).

Can a director be personally liable?

The consequences of not following the applicable rules can be quite significant. A director who authorises a dividend that is unlawful may be personally liable to repay to the company the amount, even if the director is not a shareholder.

A shareholder who has reasonable grounds to believe that a dividend is unlawful is liable to repay it. This is the case even if the company is not insolvent.

Why Birkett Long?

At Birkett Long, our Commercial and Corporate Finance Team has significant experience and expertise in running a business and looking after the director.

Our portfolio includes a very wide range of clients, from UK businesses of major multinationals, to locally headquartered listed Plcs, to SMEs and sole traders. We handle all types of commercial and corporate finance work, advising on all aspects of businesses including business structures and exit strategies. 

If you have any questions regarding dividends or how they may impact the sale of a company, please contact Thomas Emmett on 01245 453847 or, alternatively, contact Thomas at thomas.emmett@birkettlong.co.uk.