Q&As

At what point does a dividend become a final dividend?

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Published on LexisPSL on 17/10/2019

The following Corporate Q&A provides comprehensive and up to date legal information covering:

  • At what point does a dividend become a final dividend?
  • Final dividend or interim dividend?
  • Lawful distributions and justifying making a distribution
  • Directors’ duties and insolvency issues
  • Approving and paying dividends
  • Other considerations

A dividend is a type of distribution made by a company to its members. A company has an implied power to distribute its profits to its members, unless its articles of association provide otherwise. However, it is under no legal obligation to make distributions and therefore need not pay dividends, unless the rights attached to the shares specify otherwise.

The Companies Act 2006 (CA 2006) governs how a company may make distributions in CA 2006, Pt 23 (CA 2006, ss 829–853). A distribution will be unlawful if it does not comply with the requirements of CA 2006, Pt 23 and the common law rules as modified by those provisions. The CA 2006 does not regulate the actual procedure for the payment of dividends. Instead, this is normally regulated by provisions in a company’s articles of association.

This Q&A assumes that the company that is to declare and pay a dividend is a private limited company, which is not an investment company (as defined in CA 2006, s 833) or an authorised insurance company (see CA 2006, ss 833A, 843). Additional considerations, which have not been considered in this Q&A, may apply to public, listed and AIM companies. This Q&A also assume that the dividend is to be paid in cash, rather than with assets.

Final dividend or interim dividend?

The CA 2006 does not define the terms ‘dividend’,

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