Managing and declaring dividends is one of the most common and important functions of a company secretary. It can be a complex and technical area and here we set out a high level guide to the more common considerations relating to dividends. We also provide template written resolutions, which you can use to help document any dividends declared.
The following looks at a simple cash dividend and does not cover scrip dividends, dividends in specie or any other forms of distribution.
Legal requirements to declare a dividend
In order to properly declare and pay a dividend, certain conditions need to be met including, inter alia:
- Articles of Association: The articles of association of the company need to be checked to ensure that they permit the declaration and payment of dividends and what procedural requirements need to be met, TheModel Articles for Private Companies Limited by Sharespermit the payment of dividends by way of an ordinary resolution of the shareholders or the directors may decide to pay interim dividends (Article 30)
- Distributable Profits: A company may only make a distribution out of profits available for the purpose (Section 830 Companies Act 2006), Profits available for the purpose means a company’s accumulated, realised profits, 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, It would normally be for the company’s accountants to confirm the level of distributable profits a company has and it must be justified by relevant accounts as set out in the Companies Act 2006
- Ability to pay its debts as they fall due: The directors need to consider whether, having regard to the whole of the company’s business, and the actual and contingent liabilities inherent in the business, it is reasonably foreseeable that the dividend would cause the company to be unable to pay its debts as they fall due. It would be unlawful for the directors to declare such a dividend
Any director who is party to a decision to pay an unlawful dividend would potentially be personally liable for breach of his director’s duties.
Interim and final dividends
There are two standard types of dividends, being interim and final dividends, as follows:
- Interim Dividends: These are declared by the director(s) solely and are generally paid during the financial year if the directors so desire
- Final Dividends: These are recommended by the director(s) but are actually approved by the shareholders in a general meeting, or by written resolution. These are generally paid at the end of the financial year
As well as the method of declaring the dividends, interim and final dividends are also treated in different way as follows:
- Interim Dividend – Effect: The declaration of an interim dividend does not generally create an obligation on the companyto pay the dividend or a right on the shareholder to receive it. In theory, an interim dividend can be revoked by the directors, before it is paid. Therefore, an interim dividend only creates a right for the shareholder when it is paid. This is generally the tax date of the dividend
- Final Dividend – Effect: Upon approval by the shareholders, a final dividend creates a binding obligation on the company to pay, regardless of when the dividend is actually paid. Therefore, the effective date of a final dividend will be the date of the shareholder resolution
Precedent documents
We have drafted the following precedent documents for the declaration of dividends that you are welcome to download and use as you see fit. Please note that every company is different and these documents should be treated as a starting point. They will not be suitable for all companies. We would always recommend that you obtain professional legal and accountancy advice and we do not accept any liability for your use of these documents.
Dividend Vouchers: From 6 April 2016, it is not expected that Dividend Tax Vouchers will be required and therefore we have not included any precedent for these.
Tax
Please note that this article has intentionally not commented on the tax implications of dividends and we recommend that you obtain professional tax advice if you are in any doubt as to your situation.
NOTE:
The information on this page is provided for general guidance only and no liability is accepted in respect of its use. It is not intended to be comprehensive and it does not cover all matters applicable to the subject.If you use the provided documents without engaging Elemental CoSec then you are responsible for completing the documents and Elemental CoSec accepts no responsibility or liability for your use of the documents.
