A dividend is a distribution of a company’s profits to its shareholders. Under the Companies Act 2006, a company may only pay dividends out of distributable profits. These are generally accumulated, realised profits available for distribution, less accumulated, realised losses. Having enough cash in the bank does not, by itself, establish that a dividend is lawful.
This article is part of the reference collection published by Harper James. It focuses on the position of directors of companies governed by the laws of England and Wales.
An interim dividend is declared by the directors, subject to the company’s articles of association and the rights attached to its shares. The board should review current management accounts, relevant annual accounts, previous distributions and the company’s financial position before approving it.
A final dividend is normally recommended by the directors and declared by the shareholders in general meeting, or in accordance with the company’s articles. Shareholders cannot declare a final dividend above the amount recommended by the directors. The resolution should record the amount, the share classes affected, the record or payment date, and any applicable conditions.
Before approving or recommending a dividend, directors should confirm the amount of distributable reserves using the company’s relevant accounts. They should also check the articles, shareholders’ agreement and share rights, including any preference or differing dividend rights. The board should consider whether the company can meet its debts as they fall due and retain sufficient working capital for known commitments.
The decision should be recorded in board minutes, supported by the accounts and calculations used. The company should then update its accounting records, issue the appropriate payment documentation and maintain evidence of the dividend declaration. A company secretarial process should also ensure that any required shareholder resolution and statutory records are completed.
A dividend paid without sufficient distributable profits is unlawful, even if the directors acted in good faith. A shareholder who knew, or had reasonable grounds to believe, that a distribution was unlawful can be required to repay it. Directors may also face personal exposure where their conduct involved a breach of duty or other legal wrongdoing.
If the company has insufficient distributable reserves, the board should not treat cash availability, shareholder expectations or a prior year’s profit as authority to make the payment. The accounts and proposed distribution should instead be reviewed before any declaration or payment is made.