The support announced by the Government to date for the COVID-19 outbreak, is limited for directors of owner-managed businesses who receive their remuneration predominantly by dividends and a small salary. Therefore, director/shareholders may want to continue to pay dividends where possible during this time. Care must be taken, however, that these distributions are lawful and the company has appropriate reserves available to pay them.
A company can only make a distribution where it has sufficient distributable reserves at the date of payment, as well as the date of declaration. In general, for most normal trading companies, its accumulated profit and loss reserves will equate to realised profits and are therefore available to distribute as dividends.
In order to determine whether a company has sufficient realised profits to make a distribution, directors should use up to date financial information such as management accounts and not just the last set of audited or submitted accounts. It will be particularly important for those companies that have been impacted by the current coronavirus outbreak to ensure that they are using the latest available financial information.
If a company pays a dividend with insufficient distributable reserves then that dividend is unlawful. Technically, the whole of the dividend is unlawful, not just the element not covered by distributable reserves. Therefore, if a dividend of £100,000 was declared and the company only had reserves of £99,999, the whole dividend is technically unlawful! If you are faced with this scenario, we would recommend that you review whether it is possible to cancel the dividend and/or take legal advice as appropriate.
Directors who make an unlawful distribution could be in breach of their fiduciary duties. If this is found to be the case, the directors may be personally liable to repay the company, even if they are not shareholders. As directors are expected to have a good knowledge of their company, ignorance would generally not be a defence if they ‘ought to have known’ that the distribution was unlawful.