A Word Of Caution Regarding Dividends: Guest article from Parker Andrews, Licensed Insolvency Practitioners
A WORD OF CAUTION REGARDING DIVIDENDS
As we all know, dividends can only be paid to a company’s shareholders when there are sufficient distributable reserves available for payment of a dividend, otherwise the dividends may have to be repaid.
We have often seen situations where director shareholders have taken dividends (understandably due to the tax efficiency of this means of being paid) but, unfortunately, the company has hit hard times and entered a formal insolvency process – in this scenario, the dividends have had to be repaid.
A few things have sprung to mind from our experiences which we feel are worth sharing:
1. If a company is experiencing a difficult time, reasonable salary may be less tax efficient but it is far less likely to be challenged by creditors in the event of insolvency.
2. Where a company seems to be headed for insolvency and there is likely to be an unlawful dividend issue, early consultation with an insolvency practitioner is key.
3. The potential issue can then be discussed and a plan formulated for a voluntary insolvency process where potentially the director/shareholders agree to repay the dividends over time or make a reasonable lump sum offer in full and final settlement, based on affordability, to avoid the cost to creditors of litigation and a more prolonged insolvency process. This is far preferable to the company being forced into liquidation via a creditor presenting a winding up petition with the dividend issue left ‘up in the air’ to be dealt with at a later date.
Should you wish to discuss the above in more detail, please do not hesitate to contact Antony, Nick or David – we of course continue to offer free, initial, no obligation consultations to prospective clients and would encourage our referrers and their clients to make use of this free service.