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Tip of the Month : March
Published on: 18 March 2009
This is a recurring problem for us in insolvencies.
We understand that it is quite normal for directors / shareholders in small companies to be remunerated by a small salary plus regular drawings during the year, which are cleared by way of a dividend at the year end.
The problem that we are regularly encountering is that when an insolvency arises, it transpires that in at least the period since the last accounts, there have been no distributable reserves. The dividend cannot be declared and the director is left with an overdrawn loan account relating to his remuneration, which he then has to repay.
The law states that the dividends are unlawful once the directors should have known that there were no distributable reserves. As the directors are required to keep proper books and records of accounts, and to know the financial position of the company, ignorance does not provide a good defence.
The responsibility for declaring interim dividends lies with the board, and therefore any unlawful dividends paid are the responsibility of the entire board on a joint and several basis for each individual. If there is only one active director, which happens particularly with husband / wife-run companies, ignorance of what is going on by one director, in breach of their duty as a director to know what is going on, does not provide them with a reliable defence.
Portland tip: if you are going to recommend that directors take part of their remuneration in dividends, make sure that they keep a close eye on the balance on the profit and loss account!
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