What happens when a company cannot pay dividends to shareholders?
If there are insufficient funds in a company, it will not be in a position to make dividend payments to its shareholders. Paying dividendswhen insufficient profits exists could mean these as classed as ‘unlawful dividends’ and the consequences for you as director could be severe.
What happens if I can’t afford to pay dividends to directors and shareholders?
Potential ramifications for paying dividends when you can’t afford them
What to do if your company can’t afford to pay dividends
How often and how much can I take in dividends?
There is no limit to the frequency and amount of dividends that can be taken to a company so long as there are sufficient reserves in the business tosupportthem. The Companies Act 2006, lays down the circ*mstances in which dividends can be paid, and a key issue is that sufficient realised distributable reserves exist within the business prior to payment.
The rules and regulations surrounding the payment of dividends are specific, and intended to protect companies and their creditors, so it’s a risky decision to pay dividends when they may be deemed unlawful if the business fails in the future.
If your company can’t financially support dividend payments you may be worried that shareholders will remove their investment, so what might happen under these circ*mstances and is there anything you can do to help the situation?
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What happens if I can’t afford to pay dividends to directors and shareholders?
If a shareholder has invested in the company with a view to receiving regular dividend payouts, failing to receive the anticipated return may result in the sale of their shares. The problem is that if you pay a dividend regardless of the company’s financial position, the risk to you as a director is significant.
Failing to comply with the Companies Act 2006 can result in accusations of misconduct and if taking a dividend endangers the company or its creditors at the time of payment or later on, it’s likely to be viewed as a breach of director fiduciary duty.
It may be the case that shareholders withdraw their investment in the company due to the non-payment of dividends, but if you look at the broader picture, paying dividends the company cannot support is a huge risk to you personally.
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Potential ramifications for paying dividends when you can’t afford them
Directors who sanction the payment of dividends when they can’t be supported by the company face the prospect of being held personally liable for the company’s debts resulting from the payment.
If the company has to be liquidated and the cause of decline is traced back to illegal dividends, the liquidator and/or company creditors could pursue you through the courts for repayment.
Furthermore, the Company Directors Disqualification Act, 1986, (CDDA) may come into play if ‘unfit behaviour’ is proven, and this could result in a ban from being a director for up to 15 years.
So what can you do to help your company return to a stronger financial position, and be able to pay dividends to yourself, other directors, and shareholders? Dividends are taken from the profits of a company, so focusing on improving profit levels should be a key focus.
Is your company insolvent?
If your company is insolvent you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
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What to do if your company can’t afford to pay dividends
If you can’t afford to pay dividends to directors and shareholders you first need to establish whether the company is experiencing a temporary drop in reserves, perhaps due to a one-off purchase or a burdensome finance agreement which is coming to an end, or whether the company's problems run deeper than this.
If you have reason to believe your company is insolvent - or is soon likely to be - then it’s highly advisable to seek guidance from alicensed insolvency practitioner (IP) in this respect as they can guide you on your next steps and ensure you mitigate your risk of personal liability for company debts.
If you are insolvent, your options may includea process of financial and operational restructuringviacompany administration.Making several small changes in your business can significantly improve your overall profit levels - these might include cutting costs and minimising inefficiencies, through to streamlining your company's operations to divest it of unprofitable arms. You may also be able to negotiate lower prices with your suppliers, or review your own pricing structure to increase your profit margins.
Alternatively you could consider restructuring your debts via aCompany Voluntary Arrangement (CVA)which would give your company the chance to repay what it can through a series of affordable instalments. As a CVA is legally-binding on all parties, it gives you a huge amount of security and certainty when it comes to your outgoings and obligations to creditors.
Need to speak to someone?
If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080
For reliable professional advice when your company can’t afford to pay dividends to its directors and shareholders, please contact one of our expertsat Real Business Rescue. We operate an extensive network of offices nationwide, and can offer you a free same-day consultation.
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