When can dividends be paid by a company?
Most businesses operate through a company structure. The company is owned by the shareholders and run by the directors. Very often the shareholders and directors are the same parties.
The expectation is that the company will make a profit. The profits are then paid to the shareholders by way of dividend.
How is a dividend paid?
The Companies Act regulates how and when dividends are paid. In simple terms, the company must have sufficient distributable profits (and cash); and the directors must approve the payment of the dividend.
It is essential that the directors have accurate financial information to hand, including cashflow projections, before they can be certain that the company has sufficient profits to pay to the shareholders.
Is there an obligation to pay a dividend?
Generally, there is no obligation on the company to pay a dividend. It is up to the directors to decide whether to pay a dividend and how much of a dividend should be paid.
Who receives the dividend?
The dividend should be paid to all shareholders if there is only one class of share.
If it turns out that the company did not have sufficient profits, then the dividend is unlawful. The company can demand that the shareholders repay the money. It is classed as a debt owed by the shareholder to the company. Dividends are lawful, any other payment is treated as an unlawful dividend.
It is not unusual for disputes to arise between business partners. The dispute can be particularly difficult if the business partners also happen to be spouses and the company is just one of many matrimonial issues to be addressed.
If the dispute is particularly acrimonious, the directors and shareholders might be tempted to cut corners when dealing with dividends. Perhaps one party might drain the company’s bank account. Or perhaps the directors might pay dividends to just one shareholder rather than the other shareholders. Or perhaps the financial records of the company are not up to date because the directors have failed to communicate with each other about the financial status of the company and its cashflows.
Disputes between shareholders and directors can be difficult to resolve. If the company suffers as a result of the dispute, it might result in the creditors taking over the company by appointing a liquidator.
The liquidator will then check the financial records and will demand repayment of any unlawful dividends. The main creditor tends to be HMRC. And HMRC has little interest in knowing the details of the dispute between the parties, it just wants its money back and will not shy away from legal action to do so.
Don’t let a dispute with a business partner turn into a dispute with HMRC (or other creditors).
If you have any questions about dividends or how a company is being run, please contact Alasdair Smith.