Quarterly News

Keeping on the right side of the law

Dividend extraction is frequently the right move when withdrawing profits from a company for tax efficiency but you need to ensure that you have considered the legal aspects as well.

A company can only make a distribution by way of a dividend out of profits available for that purpose.

These profits are defined as its accumulated realised profits not previously utilised, less its accumulated losses not previously written off.

In order to determine whether a dividend payment may be made, the Companies Act 2006 requires justification of the distribution by reference to relevant accounts.

Relevant accounts are the company's last accounts prepared in accordance with the Companies Act 2006, interim accounts or initial accounts. Both interim and initial accounts must enable profits, losses, assets, liabilities, share capital and reserves to be determined.

An unlawful dividend is any distribution made by a company to its shareholders that breaches the rules on dividends.

The law is very specific in this area and a minor technical breach of them will lead to an unlawful dividend. The most likely example of a breach is insufficient profits to make a distribution at a particular date.

The consequences of such a breach in the law render the shareholders liable to repay the dividend to the company if at the time of distribution they knew or had reasonable grounds to suspect it was unlawful.

Should an unlawful dividend be distributed, directors are considered to be 'in default' if they permit or fail to prevent the breach. This can lead to a liability that the directors have to pay personally.

For dividends to be valid, certain other procedures need to be followed, so please contact us for further advice.

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