Article - Companies

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.

Any Shareholder wishing to receive the dividends in such a manner can obtain a standard form of mandate from a high street bank.

Article First Published: 22 September 2003

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The views on this website are not necessarily those of the Student Law Journal and is not intended to provide legal advice.  Any legal problems should be specifically addressed to a solicitor.

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