Recovery of unlawful dividends by an insolvency office-holder
Recovery of unlawful dividends by an insolvency office-holder

The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:

  • Recovery of unlawful dividends by an insolvency office-holder
  • When can dividends be declared?
  • Reclaiming dividend
  • Statutory defence for directors under CA 2006, s 1157
  • Procedure

Recovery of unlawful dividends by an insolvency office-holder

A situation frequently arises where payments are made on account of dividends during a financial year, with the intention of declaring a dividend at year end. If the company fails then there are no distributable profits from which a dividend may be declared and the payments on account, often treated as loans, are recoverable.

In the case of private companies director/shareholders are often advised to adopt this procedure as a tax saving measure.

When can dividends be declared?

Under Part 23 of the Companies Act 2006 (CA 2006) distributions may be made to members only out of profits available for the purpose, which in summary means accumulated realised profits less realised accumulated realised losses, so far as not previously utilised or written off respectively.

The determination of the profits available for distribution is by reference to the company's last annual accounts, with two exceptions:

  1. where the distribution would contravene CA 2006 by reference to the last annual accounts, interim accounts may be used

  2. if the company has not yet prepared any annual accounts, initial accounts may be used

Whether a profit or a loss is 'realised' is to be determined by reference to generally accepted accounting principles at the time when the accounts are prepared.

There are additional or special provisions for:

  1. public companies,

  2. investment companies,

and companies carrying on long-term insurance business.

In

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