8 Mins
Written by: Shona Campbell
Partner & Head of Business Recovery and Insolvency
Last reviewed: 3 November 2026Closing a limited company is rarely as simple as submitting paperwork and walking away. Whether a company is being dissolved, placed into a Members’ Voluntary Liquidation (MVL) or entering an insolvent liquidation process, directors must ensure company assets are dealt with correctly.
Assets can include cash, property, vehicles, equipment, stock, intellectual property and money owed to the business. What happens to those assets depends largely on the method used to close the company and whether the company is solvent or insolvent.
Understanding the rules around company assets can help directors avoid unexpected complications and ensure shareholders, creditors and other stakeholders are treated appropriately.
What is an unlawful dividend and can directors be held personally liable?
An unlawful dividend is a dividend paid when a company does not have sufficient distributable profits to support the payment. If the company later enters insolvency, the circumstances surrounding the dividend may be investigated.
A shareholder who received the dividend may, in certain circumstances, be required to repay it, while directors who authorised the payment may separately face questions about whether they complied with their duties when doing so.
Key Takeaways
- Dividends can only be paid from available distributable profits.
- Cash in the bank does not necessarily mean profits are available for distribution.
- If anticipated dividends cannot be supported, drawings taken by directors may result in an overdrawn director’s loan account.
- A shareholder who receives an unlawful dividend may, in certain circumstances, be required to repay it.
- Historic dividend payments are likely to be considered where a company subsequently enters insolvency.
- Taking advice early can help directors understand the position before further payments are made.
What Is an Unlawful Dividend?
A dividend is a distribution of company profits to shareholders.
Under UK company law, dividends can only be paid from accumulated realised profits that remain available for distribution after accumulated realised losses have been taken into account.
An unlawful dividend occurs when:
- The company does not have sufficient distributable reserves.
- The dividend exceeds the profits available for distribution.
This issue commonly affects owner-managed businesses where directors are also shareholders and regularly withdraw funds throughout the year.
Why Unlawful Dividends Become an Insolvency Issue
When a company enters administration or liquidation, an insolvency practitioner will review the company’s financial affairs and transactions before the insolvency. This will often include dividends and other payments made to directors and shareholders.
Where dividends have been paid, the insolvency practitioner will consider whether sufficient distributable profits were available, how the dividends were declared, the financial information available at the time and the circumstances surrounding the payments.
Not every issue identified will necessarily result in recovery action. The position will depend on the particular facts and circumstances.
How Do Unlawful Dividends Happen?
Unlawful dividends are not necessarily the result of deliberate misconduct. In practice, problems can arise where directors are relying on financial information that is incomplete or out of date, or where the company’s performance changes significantly during the year.
For example, anticipated sales may not materialise, customers may fail to pay or year-end adjustments may reduce the profits previously expected. This can mean that dividends which directors anticipated would be supported by profits are not ultimately supported by sufficient distributable reserves.
This is particularly relevant in owner-managed businesses where directors take regular drawings during the year expecting them ultimately to be covered by dividends. If the anticipated profits do not materialise, some of those drawings may instead result in an overdrawn director’s loan account and potentially become repayable to the company.
Reliance on Management Accounts
Directors may approve dividends using management accounts that later prove inaccurate.
For example, anticipated sales may not materialise, bad debts may increase or year-end adjustments may reveal lower profits than expected.
Confusing Cash With Profit
A company may have substantial cash in its bank account while lacking distributable profits.
Directors sometimes assume available cash automatically means dividends can be paid. In reality, distributable reserves rather than cash balances determine whether a dividend is lawful.
Drawings Treated as Dividends Later
In many owner-managed businesses, directors withdraw money throughout the year and intend to declare dividends retrospectively.
If profits do not materialise, those drawings may be reclassified, potentially creating an overdrawn director’s loan account rather than a legitimate dividend.
Financial Distress and Cash Flow Pressure
Businesses facing declining revenues, rising costs or mounting creditor pressure may continue making dividend payments despite deteriorating finances.
This can create complications if the business later becomes insolvent.
Director Responsibilities
Directors are responsible for ensuring dividend payments comply with company law and are supported by appropriate financial evidence.
Before declaring a dividend, directors should consider:
- Whether sufficient distributable reserves exist.
- The accuracy and reliability of available financial information.
- The company’s cash flow position.
- Future liabilities and commitments.
- Whether the company may be approaching insolvency.
As financial difficulties increase, directors’ duties increasingly shift toward protecting creditor interests rather than shareholder returns.
Can Unlawful Dividends Be Recovered?
Potentially, yes.
Where a dividend was paid without sufficient distributable profits, an insolvency practitioner will consider the circumstances of the payment and whether there are grounds to seek recovery.
A shareholder who received an unlawful dividend may, in certain circumstances, be required to repay it. Separately, the conduct of directors who authorised the dividend may be considered as part of the insolvency practitioner’s review of the company’s affairs.
Whether recovery action is appropriate will depend on the particular facts, including the circumstances in which the dividend was declared and the information and knowledge of those involved at the time.
Unlawful Dividends vs Director’s Loan Accounts
It is not uncommon for directors to discover what they believed were dividends are actually loan withdrawals.
If a dividend is found to be unsupported:
| Unlawful Dividend | Director’s Loan Account |
| Purported distribution of profits | Money borrowed from the company |
| May be subject to recovery | Usually remains repayable by the director |
| Focuses on distributable reserves | Focuses on amounts owed to the company |
| Often reviewed during insolvency investigations | Common issue in owner-managed businesses |
| Investments and shareholdings | Sold or distributed as part of the liquidation |
Understanding the distinction can significantly affect outcomes for directors and creditors.
What Should Directors Do If They Are Concerned?
If there is any uncertainty over whether previous dividends were supported by sufficient distributable profits, or the company is beginning to experience financial pressure, directors should take a step back and establish the position before making further distributions. This may involve bringing management accounts up to date, checking the level of distributable reserves and understanding how any drawings taken by directors have been recorded.
Where the business is experiencing financial difficulty, taking advice early from an insolvency practitioner is important. This does not necessarily mean that a formal insolvency process will be required, but it allows directors to understand the company’s position, identify any potential issues with dividends or directors’ loan accounts and consider the options available while there is still time to do so.
Conclusion
Unlawful dividends often arise from misunderstandings about distributable profits, cash flow or the company’s true financial position. While many cases involve genuine mistakes rather than deliberate wrongdoing, dividend payments can become a significant issue if a company later enters insolvency.
By maintaining reliable financial information, understanding director responsibilities and monitoring solvency closely, businesses can reduce the risk of unlawful distributions and make better-informed decisions during periods of financial uncertainty.
Frequently Asked Questions
Not necessarily. Dividends can only be paid from distributable profits, not simply because cash is available. A company may hold significant cash balances while having insufficient distributable reserves due to losses, liabilities or previous distributions. Directors should review current financial information before approving any dividend payment.
Potentially. Liability depends on the circumstances, including what the directors knew or should reasonably have known at the time. If directors authorised payments without sufficient distributable profits or failed to fulfil their duties appropriately, recovery action may be considered during an insolvency investigation.
An insolvency practitioner will typically review past transactions, including dividend payments. They will assess whether the dividends were validly declared, supported by distributable profits and consistent with directors’ duties at the time. Recovery action may be pursued where there are grounds to do so.
The timeframe varies depending on the insolvency procedure, the nature of the transactions and the issues identified during investigations. Insolvency practitioners routinely review historic accounting records, board decisions, company accounts and shareholder distributions when assessing potential recoveries.
Directors should maintain accurate accounting records, review management accounts regularly, verify distributable reserves before declaring dividends and ensure decisions are properly documented. Monitoring cash flow, liabilities and solvency indicators can also help prevent issues from arising as business conditions change.
