Extracting Cash - Dividends
27th Jul 2010
A “dividend” is a distribution of a company’s profits amongst its shareholders based on their shareholdings.
Dividends are usually paid in cash, although other forms of payment are possible, for example a distribution of tangible assets (known as a “dividend in specie”).
There is a strict statutory framework governing a company’s ability to pay dividends.
All companies must refer to their Articles of Association to follow the proper procedure in order to ensure that the dividend is lawful.
For example, the Articles may prohibit the payment of a dividend to the ordinary shareholders, while dividends on preference shares remain in arrears.
Most private company Articles provide for final dividends to be declared by the shareholders in general meeting (or by written resolution) but give the directors the power to pay interim dividends.
The principle of capital maintenance underlying the statutory framework generally means that the profits of a company may only be distributed to its shareholders while it is a solvent, going concern.
The basic statutory provision is that a company may only pay dividends when it has profits available for distribution, defined as a company’s accumulated, realised profit (so far as not previously utilised by a distribution or capitalisation) less its accumulated, realised losses (so far as not previously written off in a reduction or reorganisation of capital) determined by reference to its relevant accounts.
In addition, public companies must ensure that they have adequate net assets, taking account of the dividend proposed.
Once a dividend becomes properly due, a shareholder has the right to enforce it as a debt due from the company.
The consequences of not complying with the legal requirements in relation to dividends can be severe.
The recipient shareholders may have to repay the unlawful distribution and the company’s directors may also incur personal liability if they have acted in breach of their duties. A shareholder can apply for an injunction to prevent the payment of an unlawful proposed dividend.
A distribution has tax consequences both for a recipient shareholder and the company. The distributing company will generally have to pay corporation tax on all of its profits, including amounts distributed by way of dividend, whiles shareholders are likely to have to pay income tax on distributions they receive.
Non cash distributions to employees or directors who are also shareholders may be taxed as a benefit in kind.
* David Wilson is a solicitor and specialist in company law at BHP Law. For more information, contact him on 0191-221 0898.
Author: David Wilson, Solicitor, BHP Law (info@bhplaw.co.uk)
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