You may have noticed in the press recently lots of stories about questionable dividends and investigations into where money went from a company, such as why dividends have been paid out, as is the case of BHS. In the case of quoted and much larger companies, there have been increasing meetings to authorise a dividend that had already been paid – you may be wondering if its easier to just sit tight and do nothing? However ensuring dividends are properly paid is vital to the constitution of the running of a company.
Case law has established that directors involved in paying out a dividend that was unlawful may make them be personally liable for any unlawful distribution, despite how honestly the have acted. Similarly, a shareholder who has reasonable grounds to think that the dividend is unlawful, will be liable to pay it back, along with interest. Therefore, the consequences of failing to properly adhere to any procedure could have draconian effects on the shareholders or directors.
At all times, Directors should be mindful of their obligations under the Companies Act 2006, in particular the duty to act in a way that promotes the success of the company. Paying out a dividend that puts the company into financial difficulty would of course fall foul of that.
Therefore, in order to make sure the company is properly paying out a dividend, consider the following points throughout the decision making process:
- Check the company’s dividend policy – look at the Articles of Association and the check any shareholders agreements to establish what this is.
- Check if any criteria are met – usually this will involve looking at the financial performance of the company and determining if there is enough money to pay out the dividends.
- Consider if shareholder or board approval is required – if so, hold the necessary meetings with the relevant people required, by giving as much notice as possible in the usual fashion.