Negative balance sheet

Negative balance sheet

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Year 1 client started as a one man band. 9 months in a second shareholder came on board.

It was agreed between the current director shareholder and new director shareholder that a dividend would be declared the day before the new share issue. This agreement was based on the initial director taking no salary and building up the company etc.

The amount has not been paid from the company, but has been credited to the directors loan account which was already in credit.

Having now completed the accounts the balance sheet is negative.

I can't simply ignore the dividend as it was declared and the client has all the paperwork etc.

I understand that this is an "illegal dividend" so how do I deal with? As it was an issued dividend that was credited to the current account does it remain in the accounts with a balance sheet note advising of the divi being in excess of distributable reserves creating the negative balance sheet and that they acknowledge that it is repayable?

Any other suggestions?

Replies (11)

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By cheekychappy
20th Jan 2016 21:52

Slap the client on the wrist

I agree with your analysis. 

 

Your client should be made of the ramifications of their decision should the company become insolvent. 

At the same time, stress the importance of making these decisions before taking professional advice. 

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By johngroganjga
20th Jan 2016 22:05

You don't need to "deal with it" (i.e. the fact of it being illegal) in the accounts at all, and I don't agree that the additional disclosures you are considering are necessary.

Thanks (1)
RLI
By lionofludesch
21st Jan 2016 08:56

Assumption

Is the assumption that there were insufficient funds at the time the dividend was paid a fair one?

Just asking, like.

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By johngroganjga
21st Jan 2016 09:24

I agree that lion's point is relevant to the question of whether the dividend was legal at the time it was paid, but the OP's question is largely about how to to deal with it in the accounts. As it is my view that the treatment of illegal dividends in accounts should be identical in every respect with the treatment of legal dividends, I do not see that whether the payment was legal or not is relevant for that purpose.

It is of course relevant to the wrist-slapping that cheeky rightly recommends.

 

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RLI
By lionofludesch
21st Jan 2016 09:37

Agree

I agree with that.

I'm also aware that proper provision might not have been made for tax and the dividend may well represent the cash in the bank account at the time.  Pure speculation at the moment, I agree.

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By PALacc
21st Jan 2016 20:44

No management accounts were done to the date of the dividend to prove the dividend would have been legal at that time so definitely a wrist slapping.

So the outcome - show the divis in the accounts (as documentation is in place). Negative balance sheet note showing divis in excess of reserves and repayable by shareholders so that directors/shareholders confirm that the dividend wasn't right to issue.

Anything else that anyone can suggest that I should be doing? The company is trading very well and the directors do not anticipate any liquidity issues and have already confirmed that profits 9 months in have exceeded last years.

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Replying to User deleted:
RLI
By lionofludesch
22nd Jan 2016 09:38

Out of interest ...

PALacc wrote:
No management accounts were done to the date of the dividend to prove the dividend would have been legal at that time so definitely a wrist slapping.

Just out of interest, how was the quantum of the dividend determined ?

Massive clear out of the bank balance ?

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Replying to User deleted:
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By PALacc
22nd Jan 2016 15:16

A credit  to the directors

A credit  to the directors current account. Having not consulted us, the director determined on his own back that a dividend of that value should be raised prior to the new investor coming on board to account for the hours and work he had put in to set up and establish the company.

He has provided the dividend paperwork so in that respect it is valid and shouldn't be ignored.

I have spoken to the directors and advised the need for the dividends to be declared out of retained earnings and that the balance sheet is now showing a negative figure.

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Replying to Wanderer:
RLI
By lionofludesch
23rd Jan 2016 10:37

Misread

PALacc wrote:

A credit  to the directors current account. Having not consulted us, the director determined on his own back that a dividend of that value should be raised prior to the new investor coming on board to account for the hours and work he had put in to set up and establish the company.

I wasn't asking how it was paid - how did he decide how much he was going to pay ?

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By johngroganjga
21st Jan 2016 20:56

I have already given you my opinion that the note you refer to is not necessary. Like I keep saying the supposed illegality of the dividend is not a matter to be dealt with in the accounts at all.

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By kiwilondon99
22nd Jan 2016 16:08

going concern ?

going concern note possibly by you -  and/or directors statement q4 less than expected but recovered in current q1 and trading as anticpated/ahead of projections ...

div may well have been up to reserves level  at the tim e of new shareholder arrival - so no issu =e with illegal or otherwise if thuis was the case

fact is balance sheet is negative at year end surely so deal with this ?  also is the directors loan shown as ciurrent or long TL - is he able to draw it within 12 months or the credited dividend eleement to be due to him over a long term ?

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