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Negative Reserves

If a company has created negative reserves in the financial statements and declared dividends. What are the consequences of this?
Do we need to make a note to the accounts?
Do companies house need notifying?

Steve Kemp


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12th Nov 2004 14:14

distributable reserves
Company legislation allows a company to make distributions from its distributable reserves. It is possible to have negative and distributable reserves at the same time, because there is also the possibility of undistributable reserves. Typically there is little scope for ambiguity in the actual position in approved accounts.

The payment of a dividend requires certain formalities and activities, such as minutes, and dealing with ACT, and there may be a debate about the timing. The accounts are prepared at a point in time, and if the dividend is declared after the last approved accounts, it may be that sufficient realised reserves have been generated since to support the distribution - but the company would have to demonstrate this in some way.

I would suggest that before going into panic mode, someone investigates the facts.

Having established the facts, you may wish to seek legal advice, both in interpreting the facts, and in understanding the consequences of any breaches that may have arisen.

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12th Nov 2004 13:43

Seek legal advice
I am not a lawyer, but understand that this is potentially very serious.

Any distribution (incl. the payment of dividends) made in contravention of the Companies Acts (and, in particular, one not covered by distributable reserves) is an unlawful or illegal distribution and the company can require repayment by the recipient of the distribution.

Furthermore, the directors may be liable for breach of their fiduciary duties.

I suggest you seek legal advice urgently.

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