It is important to be aware that the payment of dividends has a strict legal framework. Whatever the size of the company, this framework applies. If the right process is not followed, the dividend will be unlawful and potentially serious consequences may arise.
What is a dividend?
A dividend is a way for a company to return cash to its shareholders.
Dividends are a useful (and potentially tax efficient way) of providing additional income to an owner/manager. They can also be used to reward investors or to move money between company groups.
The foremost common sorts of dividends are:
- Final Dividends - these are paid once a year after the yearly accounts have been arranged. Ordinarily, they are prescribed by the chiefs and ‘declared’ (endorsed) by the shareholders.
- Interim dividends - these can be paid at any point of the company’s monetary year and are regularly pronounced by the directors.
Declaring a legal dividend
There are a number of legitimate prerequisites that must be met prior to the issue of a dividend:
1. The company must have adequate distributable profits.
The companies Act 2006 requires profits to be paid out of ‘profits accessible for the purpose’. In the case that there are not sufficient profits to be able to pay out the declared dividends than it must not be neither issued nor declared.
2. Dividends must be advocated by reference to accounts.
The chiefs got to have a set of accounts that demonstrate there are adequate distributable profits. The accounts must be either:
- The company’s final yearly accounts,
- If those yearly accounts appear that there are inadequately distributable benefits, the profit must be advocated by reference to more up-to-date ‘interim accounts’, or
- If the profits are being pronounced at the beginning of a company’s bookkeeping period, ‘initial accounts’ must be prepared.
3. The board must consider the company’s current and imminent financial position.
The accounts, in fact, only reflect a portion of the overall picture –since they will have been filed up to a date prior to the board make their choice on whether to pay a dividend.
Directors must also pay close attention to a company’s future financial position ought to the profit be paid. Chiefs must agree that, on the off chance that distributable profits are adequate to be paid out, the company will still be able to meet its continuous obligations and liabilities. The company must moreover have enough liquidity to pay the profit. Money position is important to the issues said in this paragraph.
4. Review the company’s articles of association
A company’s articles, more often than not, contains provisions related to dividends. As an example, it may be possible that companies pay out dividends only on the full amount of paid shares. Or the instalment may be limited to a certain type of share. As a rule, shareholders are entitled to get profits distribution according to the number of shares that they hold – but the articles ought to be checked. In addition, the articles may indicate a specific way in which dividends got to be authorised.
5. Comply with directors’ duties
When the executives are choosing whether to announce a dividend payout, they must have respect for their obligations. These incorporate obligations such as:
- Act according to the limits of their powers and share the company’s achievements for the benefit of its employees.
- Exercise reasonable skills and care; and
- Declare an intrigued within the proposed payment (this will be important; in case an executive member is a shareholder).
These obligations include defending the company’s resources (see point 3 above)
6. Keep records to prove your decisions
Directors ought to guarantee that they disclose board minutes showing the method of announcing a dividend. This ought to incorporate references of the financial data depended on and the directors’ obligations that have been taken into account.
7. Consequences of declaring an illegal dividend:
If the right procedure isn’t followed, the dividend will be illegal and that can lead to serious consequences such as:
- A shareholder who had benefited from an illegal dividend will need to reimburse it (entirely or the illegal part of it) to the company in the event that they are aware of it, or if they have enough pieces of evidence to claim that the dividend breached the legitimate rules. On the off chance that the shareholder is an executive member of the company, they will not be able to elude this liability really easily.
- An executive member who approved the dividend’s payout may be in breach of their director’s obligations and can be held personally liable to reimburse the company, also in the event that they are not a shareholder.