Declared dividends

Declared dividends

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I have a client that has declared dividends 1month prior to the YE to clear the remaining reserves, these have been paid. However, as it was a minor loss making year, this has obviously created a negative balance sheet. What are people's thoughts on the legality of the dividends given that they were seemingly in excess of distributable reserves?

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By [email protected]
08th Mar 2012 09:09

Declared dividends

Two questions:

At the time the distribution was made was there an expectation of the loss to come?

How is the situation different from say a new company which makes a loss in its first year of trading? That would end up with a debit balance on the P&L reserve too.

Regards,

Du

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By User deleted
08th Mar 2012 11:32

Expectation of loss may be irrelevant

Provided the dividend (and any others declared during the year) does not exceed available reserves brought forward from the prior year's statutory accounts, the dividend cannot be challenged, regardless of size of loss in current year.

The position with a new company is different, in that it has no prior year accounts on which to base the dividend. In that case, it needs to draw up interim accounts that show sufficient reserves at that time to cover the dividend.

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By thomas34
09th Mar 2012 13:01

Dividends

My understanding (and the advice I give to clients) is that dividends can only be paid out of distributable reserves i.e. cumulative profits. In small companies this means preparing a statement of affairs (balance sheet) on the back of an envelope and allow for any corporation tax on profits if applicable.

The dividend will be legal if subsequent trading at a loss causes a negative balance sheet value. In the OP's case the actual year's loss is only relevant to the extent that he'll need to establish how much of it occurred in month 12.

Technically any illegal dividends (i.e. those not paid out of profits) should be redefined as directors' loans. In practice it would be impossible for a reader of accounts to establish whether dividends are legal or not since he would not have access to the relevant dates.

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By User deleted
09th Mar 2012 13:27

Again

If the last available statutory accounts show sufficient reserves, there is no need to draw up any kind of statement - on an envelope, fag packet or otherwise. You would need to do so only if those accounts showed insufficient reserves and that you therefore needed to demostrate that reserves had increased by a sufficient amount at the time of the dividend.

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