Dividends
I
am the major Shareholder and Director of a Private Limited Company.
I believe that the company has made sufficient profits this year to
justify payment of a dividend to myself and all other Shareholders.
Is there any reason why a dividend should not be paid?
Unless
your companies Memorandum or Articles of Association prevent payment of a
dividend, the company has an implied power to pay its members a dividend
out of the profits of the company.
The
Companies Act 1985 states that distributions of dividends can only be made
out of profits available for the purpose.
In order to determine whether there are profits available for the
purpose, the company must deduct its accumulated realised losses from its
accumulated realised profits once these sums have been calculated by the
Companies Accountants.
What
happens if a company makes an unlawful payment of a dividend?
The
Companies Act 1985 has set out various situations when a company cannot
pay a dividend. These include
the following:-
(i)
any payment which will reduce the share capital of the
company;
(ii)
a payment at the time the company is being wound up;
(iii)
distributions made by way of a bonus issue of shares; and
(iv)
the use of capital or unrealised profits to redeem or
purchase shares.
If
the company pays its members a dividend which falls foul of The Companies
Act 1985, then each member who receives that dividend is liable to repay
it (or part of it if only part of it actually constitutes a breach of The
Companies Act 1985) if that member knew or had reasonable grounds for
believing there was a breach by the company of The Companies Act 1985 when
they received their dividend.
In
addition, Directors of the company may be in breach of their fiduciary
duties if they allow dividends to be paid to members knowing that the
distribution is unlawful.
Assuming
that a company is going to make a payment to its members by way of
dividend, does it have to send a cheque to each member?
Whilst
a company can of course send a cheque to each member who is entitled to a
dividend, the company may wish to obtain consent of individual
Shareholders to authorise by way of a dividend mandate their dividend
payments to be made direct to their own bank accounts.
Article First Published: 22 September 2003
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