Covid-19 Unlawful Dividend Update - April 2020

Covid-19 has forced most UK businesses to adapt and evolve in ways that were inconceivable barely a month ago and the economic effects of the pandemic are widely expected to cause a sharp contraction in GDP and an increase in company failures.

Whilst the Government has acted swiftly to support businesses including the relaxation of the wrongful trading provisions all the other directors' duties and regulations still stand.  Accordingly, the topic of unlawful dividends is more relevant to SME businesses now than ever before.

It is common practice for director/shareholders of SME businesses to be paid a modest salary through PAYE and pay the balance of their remuneration in dividends.  This of course is perfectly permissible if the company has profits available to distribute to shareholders and there is no breach of directors' duty.  Unfortunately, the dramatic effect that the Coronavirus is having on trading and many companies' abilities to continue as going concerns is likely to result in some dividends being unlawful.  In particular:

  • It is not enough that the last filed accounts show there are sufficient distributable reserves (which meets the requirement of section 830 of the Companies Act 2006).
  • At the time directors declare a dividend they must also have regard to trading since the year end and its effect on distributable reserves.
  • Directors must also consider if the company is still a going concern and ideally have financial forecasts to support that view.
  • If the company is not a going concern then assets need to be written down to break up figures and the level of distributable reserves reassessed.
  • The company must be solvent on both balance sheet and cash flow bases.
  • ... and if an interim dividend then the date all this needs to be considered is not the date it is declared but the date it is paid or posted in the accounting records.

If the company's profits are being decimated during the current Covid-19 lockdown, directors need to be extremely wary of authorising any dividend payments.  If there is any doubt they should err on the side of caution and elect to switch to salary only to avoid being faced with the very real prospect of having to repay the entire dividend to a liquidator.  There are other advantages to this too.

Further information on dividends can be found at dividends briefing sheet and we would be pleased to guide you through this if you have any concerns.

Here at McTear Williams & Wood we stand ready to help you navigate a way through this crisis.  If you have any concerns you can send us a question, use our free Business Healthcheck or simply get in touch.

It is business as usual at McTear Williams & Wood.