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Dividends and Negative Distributable Reserves

Company Distributable reserves change to negative mid year and how they affect dividends

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Happy New Year!

Scenario: A director is paying himself monthly dividends from available positive reserves. Reserves are exhosted mid year and director stops paying dividends. All seems fine. But at the YE, we assessed Reserves and Current Year losses and could see that overall Reserves are so negative that they cannot even cover the dividends paid in the first half of the year.

Question: Do we need to reverse dividends paid in the first half of the year? 

At YE the picture was very clear, the company could not pay any dividends. How do we deal with it mid year when we do not know what lays ahead?

Thanks!

 

Replies (16)

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By zebaa
14th Jan 2022 16:06

Is the company solvent ? And what sort of quantum dividends ?

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Replying to zebaa:
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By tamasv
14th Jan 2022 16:35

Fair questions.
The company is solvent indeed and we had opening reserves +£28k which then went down to -£138k at YE. £28k dividends paid.

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By Tax is always taxing
14th Jan 2022 16:18

If there were reserves at the point they were paid then the dividends are fine, just leave them. (Assuming the later half of the year was a car crash rather than the first half just being wrong?)

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By johngroganjga
14th Jan 2022 16:21

Even if they shouldn’t have been paid if all the information available at the time had been taken into account, they were still dividends and should be accounted for as such.

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Replying to johngroganjga:
RLI
By lionofludesch
14th Jan 2022 16:52

johngroganjga wrote:

Even if they shouldn’t have been paid if all the information available at the time had been taken into account, they were still dividends and should be accounted for as such.

I agree with John. A dividend is still a dividend even though it may be unlawful. Though the recipient runs the risk (however slight) that it may need to be repaid if some creditor or other doesn't get paid.

The snag is - can you prove that it was a dividend ? Is the proper paperwork in place? ACT was so useful twenty years ago ........

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By ireallyshouldknowthisbut
14th Jan 2022 16:26

I think you confusion arises by looking at the business annually rather than at the actual proper procedures for declaring dividends.

It might help to look at the rules for determining if sufficient reserves are available to declare dividends if you are not familiar, and then you can assess if there procedures have been followed.

If they have, then there will be amble evidence for the in-year dividends. You will note in particular the form of accounts for interim dividends which is fairly "light touch"

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By Winnie Wiggleroom
14th Jan 2022 16:42

Like most things in life it's all about timing, oh and having sufficient records to show why you did what you did when you did.

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By David Ex
14th Jan 2022 16:47

tamasv wrote:

Question: Do we need to reverse dividends paid in the first half of the year? 

 

No.

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By The Dullard
14th Jan 2022 18:56

To be lawful, the dividend must be justified by reference to "the relevant accounts", which by default are the latest annual (statutory) accounts.

You only look at interim management accounts if you want to pay a dividend in excess of that permitted by the last annual accounts or if there are no last annual accounts, because it is the first period of accounts. CA 2006, s 836.

The OP says that the last accounts showed reserves of £28K+ and dividends were £28K, so the dividends appear to be lawful.

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Replying to The Dullard:
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By TheNovice
14th Jan 2022 21:25

The Dullard wrote:

To be lawful, the dividend must be justified by reference to "the relevant accounts", which by default are the latest annual (statutory) accounts.

You only look at interim management accounts if you want to pay a dividend in excess of that permitted by the last annual accounts or if there are no last annual accounts, because it is the first period of accounts. CA 2006, s 836.

The OP says that the last accounts showed reserves of £28K+ and dividends were £28K, so the dividends appear to be lawful.

Would that mean if you had 28k reserves but expect to lose 15k each month thereafter you could In theory still declare a 28k dividend 6m into the year on the basis that the last accounts are the reference? I thought management accounts (basic ones) need to be drawn up?

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Replying to TheNovice:
RLI
By lionofludesch
14th Jan 2022 22:27

Quote:

Would that mean if you had 28k reserves but expect to lose 15k each month thereafter you could In theory still declare a 28k dividend 6m into the year on the basis that the last accounts are the reference? I thought management accounts (basic ones) need to be drawn up?

If that were true, hardly any microcompany dividend would be lawful.

I agree with Dulls. Last published accounts is enough.

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Replying to TheNovice:
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By The Dullard
14th Jan 2022 22:28

The law means what it says.

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Replying to The Dullard:
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By TheNovice
15th Jan 2022 09:04

The Dullard wrote:

The law means what it says.

Thank you both, I'm still learning.

Under s 836 it says "where the distribution would be found to contravene this Part by reference to the company's last annual accounts, it may be justified by reference to interim accounts, and"

In respect of "distribution would be found to contravene this part", is that saying that if you couldn't pay a dividend at the end of the last AP but you subsequently draw up interim accounts mid year you potentially could (dependent on distributable reserves of course)?

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Replying to TheNovice:
Stepurhan
By stepurhan
15th Jan 2022 10:10

Yes. If you want to pay a dividend that is more than the reserves in the last year end accounts, you must have evidence that reserves have increased enough since then. Interim accounts would be the usual way of demonstrating this.

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Replying to stepurhan:
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By TheNovice
15th Jan 2022 11:21

stepurhan wrote:

Yes. If you want to pay a dividend that is more than the reserves in the last year end accounts, you must have evidence that reserves have increased enough since then. Interim accounts would be the usual way of demonstrating this.

Thank you

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Replying to stepurhan:
Melchett
By thestudyman
17th Jan 2022 19:28

I agree it is wise to draw up interim management accounts to put the issue to bed. So much can change since the last statutory accounts. Drawing up interim accounts also allows to add various accruals which only would affect the current financial year, such as an accrual for corporation tax based on interim profits, any contingencies and bad debt provisions etc...

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