Dividend update

It is common practice for director/shareholders to be paid a modest salary through PAYE and pay the balance of their remuneration in dividends.  This of course is perfectly permissible if the company has profits available to distribute to shareholders and there is no breach of directors’ duty.  Unfortunately, the dramatic effect that the Coronavirus is having on trading and many companies’ abilities to continue as going concerns is likely to result in some dividends being unlawful.  In particular:

• It is not enough that the last filed accounts show there are sufficient distributable reserves (which meets the requirement of section 830 of the Companies Act 2006).
• At the time directors declare a dividend they must also have regard to trading since the year end and its effect on distributable reserves.
• Directors must also consider if the company is still a going concern and ideally have financial forecasts to support that view.
• The company must be solvent on both balance sheet and cash flow bases.

If the company’s profits are being significantly impacted during the current Covid-19 lockdown, directors need to be extremely wary of authorising any dividend payments.  If there is any doubt please contact us so we can advise on the best course of action. If dividends are not feasible you could increase salaries in due course albeit the additional salary cannot be recovered through the Job Retention scheme. Dividends should also not be paid out of government loans such as the Bounce Back Loan or Coronavirus Business Interruption Loan Scheme.

Disclaimer - All information in this post was correct at time of writing.