2 Mins
A liquidator has a duty to investigate the affairs of every company they are appointed to. Of particular interest are payments to directors. This is the first in a series of articles that look at the different types of payments that may be made to directors and what a liquidator will investigate. This article looks at illegal also known as unlawful dividends.
If dividend payments have been made to the director (in their capacity as a shareholder) a liquidator may ask for documentary evidence supporting the dividend payment.
1. There were insufficient profits, or the company was insolvent
The financial status of the company must be considered each time a dividend payment is made. The Companies Act states that a company can only pay a dividend if there are sufficient distributable profits out of which a payment can be made. If a dividend is paid that proves to be in excess of this profit or is made out of capital, then it is termed an illegal dividend. If a director authorises such a dividend, then the director can be deemed to have acted in breach of their statutory duties and may have to repay the funds amounting to the losses caused to the company, due to the payment of the illegal dividend. If the payment was made whilst insolvent it will need to be repaid.
2. There was no reference to relevant accounts
Payment of a dividend should be backed up with reference to a company’s accounts which can either be the annual accounts or interim management accounts. Strictly, the accounts relied on must show the company’s assets and liabilities, its share capital and include provisions for any future liabilities, such as corporation tax.
3. There was no minute prepared
Every time a dividend is paid, whether the dividend is interim or final then a minute must be prepared confirming there are sufficient distributable reserves and recording the shareholders right to receive the dividend. The minute should be signed and dated.
If the company was insolvent at the time of payment or documentary evidence cannot be produced it is likely that the liquidator will require repayment to be made.