Legal or unlawful dividends: Companies Act 2006

What requirements have to be met for a dividend to be legal? What is an unlawful or illegal dividend? 

This is a freeview 'At a glance' guide to legal and unlawful dividends. 

What is a legal dividend? 

• Companies Act 2006 (CA 2006) sets out:
  • what profits are available for distribution, and
  • what accounts are required in order to justify a dividend.
• If the requirements of the CA 2006 are not met a dividend is unlawful.
• A member (shareholder) is only required to repay an unlawful distribution if they know or have reasonable grounds for knowing that it was made unlawfully at the time of payment.

The tax consequences of an unlawful dividend depend on the eventual outcome. This is discussed in our practice note: Unlawful, illegal or ultra vires dividends  

The provisions of the CA 2006 are set out in s.830. 

A company may only make a distribution out of profits consisting of:

• Accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less
• Its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

A distribution is required to be justified by reference to the company’s:

• Last annual accounts, or
• Interim accounts, or
• Where the distribution is proposed to be declared during the company’s first accounting reference period, or before any accounts have been circulated in respect of that period, it may be justified by reference to initial accounts.

Requirements where the last annual accounts are used

The company’s last annual accounts mean the company’s individual accounts:

• That were last circulated to members.
• That were properly prepared in accordance with the CA 2006.
• Unless the company is exempt from audit and the directors take advantage of that exemption, the auditor must have made his report on the accounts.
• If the audit report was qualified:
  • the auditor must have stated in writing whether in his opinion the matters in respect of which his report is qualified are material for determining whether a distribution would contravene the CA.
  • A copy of that statement must be circulated to members.

Requirements where interim accounts used

• Interim accounts must be accounts that enable a reasonable judgment to be made as to the amounts of realised profits and losses.
• Public Limited Companies (PLCs) are required to deliver a copy to the registrar.

Requirements where initial accounts used

• Initial accounts must be accounts that enable a reasonable judgment to be made as to the amounts of realised profits and losses.
• PLCs require an auditor’s statement and a copy to be filed with the registrar.

Small print

This note summarises the basics of the CA 2006 sections 830 to 853. There are additional provisions affecting investment companies and PLCs.

Useful guides on this topic

Unlawful, illegal or ultra vires dividends
Is there a tax charge on an unlawful/illegal or ultra vires dividend?

Dividends: Formalities for companies 
This is a briefing note for discussion with directors about the formalities of declaring and paying dividends.

Dividends (how to pay & process): Step-by-step guide
A step-by-step guide to paying and processing dividends for companies and their owners.

Templates

Dividends: Board minute 
Pro-forma board minute for declaring an interim dividend.

Dividends: Tax voucher
Pro-forma tax voucher for interim dividends.