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!
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Replies (16)
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Fair questions.
The company is solvent indeed and we had opening reserves +£28k which then went down to -£138k at YE. £28k dividends paid.
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?)
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.
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 ........
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"
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.
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.
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?
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.
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)?
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.
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
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...