When a company is facing financial distress, directors must be particularly cautious about how they handle company funds. Unlawful dividends—dividends paid without sufficient profits—can have serious consequences, especially if the business later enters insolvency. Directors who authorize or receive unlawful dividends may be required to repay the money and could even face legal action.
At Aurora Recovery, we help directors understand their responsibilities, avoid pitfalls, and navigate insolvency processes with confidence.
What Are Unlawful Dividends?
A dividend is a payment made by a company to its shareholders, typically from profits. However, a dividend becomes unlawful if:
❌ It is paid when there are insufficient distributable profits.
❌ It is issued without reference to properly prepared accounts.
❌ It is paid despite the company being technically insolvent at the time.
Unlike salaries or expenses, dividends must come from accumulated profits, not general cash reserves or loans. If a company has losses that exceed its profits, it cannot legally distribute dividends.
Why Are Unlawful Dividends a Problem?
Unlawful dividends can create serious financial and legal risks for company directors, particularly in cases of insolvency. If a company later enters liquidation or administration, unlawful dividends may be clawed back, meaning directors and shareholders may be required to repay the funds.
How Are Unlawful Dividends Treated in Insolvency?
When a company becomes insolvent, insolvency practitioners investigate past transactions, including dividend payments. The following risks apply to directors who approved or received unlawful dividends:
🔴 Personal Liability – Directors may have to repay unlawful dividends, even if the company no longer exists.
🔴 Breach of Duties – Paying unlawful dividends can be seen as a breach of director duties, leading to legal consequences.
🔴 Wrongful Trading Claims – If a director allowed dividends while knowing the company was insolvent, they may face wrongful trading allegations.
🔴 Disqualification as a Director – Severe cases can result in director disqualification for up to 15 years.
How Can Directors Protect Themselves?
To avoid liability, directors should take the following steps when considering dividend payments:
✔ Check the Accounts – Ensure the company has sufficient distributable profits before approving dividends.
✔ Seek Professional Advice – Consult an accountant or insolvency specialist if financial uncertainty exists.
✔ Keep Proper Records – Maintain accurate financial records and board meeting minutes for all dividend decisions.
✔ Monitor Cash Flow – Even if past profits allow dividends, ensure future liabilities can still be met.
✔ Avoid Dividends During Financial Struggles – If the company is facing insolvency, prioritizing creditor payments is essential.
Facing Insolvency? Contact Aurora Recovery for Expert Guidance
If you’re concerned about past dividend payments or facing financial difficulties, Aurora Recovery is here to help. We provide expert advice to protect directors and ensure compliance with insolvency laws.
📞 Call us: 01134 800 397
📧 Email us: hello@aurorarecovery.co.uk
🌐 Visit our website: https://aurorarecovery.co.uk
🚨 Don’t wait until it’s too late—get professional guidance today. 🚨
Contact us now to see how we can help you: https://aurorarecovery.co.uk/contact/
Read more about dividends, on the government’s website, here: https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm15205
