Category Archives: Company Law

Dividend and the company law

With the explosion of private limited companies, particularly one-man bands, extracting profits from companies has become a genuine need for the owners to meet their personal cash flow requirements. Dividend is one of the common ways in which profits could be extracted from a company. As many director-owners tend to pay themselves a monthly dividend it is time the law behind the dividend is understood clearly. Whilst the governing law is the Companies Act 20016 (CA/06) it is equally important that the internal constitution of the company called the Articles of Association of the company (articles) too are looked up when it comes to dividend distributions.
Dividends are paid out of distributable reserves (s.830) which are defined are as the company’s accumulated realised profits less the accumulated realised losses. As the company’s capital is needed to pay off any liabilities due to its creditors, dividends cannot be paid out of capital. Dividends could either be interim dividends paid in-year or final dividends paid after the accounts of the company have been finalised for a particular accounting year. The key provisions contained within CA/06 and the model articles with regard to dividend are as follows:

1.Power to declare dividends vests with the shareholders who may declare dividends by ordinary resolutions. However, the power to declare interim dividends (i.e. those typically taken out on a monthly basis by the contracting community) is delegated to the directors who will need to ensure that the interim dividends are based on interim accounts drawn up in accordance with the relevant accounting standards. The directors must ensure that there are sufficient distributable surplus available at the time of declaration. The shareholders may resolve to reduce the dividend recommended by the directors but they cannot increase the sum of dividend recommended by the directors.

2.Eligible members: Dividend is paid to those shareholders whose names appear on the register of members as on the date the dividend becomes due and payable.

3.Illegal dividends: Where the dividends are not paid in accordance with provisions of the CA/06, these are called illegal dividends. An example is where a dividend has been paid in excess of the available surplus. In such situations the directors will be held liable. Whilst there are no criminal sanctions for payment of illegal dividends, If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable to repay it (or that part of it, as the case may be) to the company (s.847).

That said, briefly the procedure for declaring and paying the dividends are as follows:
1.Check that there are no restrictive clauses within the Articles

2.Pass a board resolution if an interim dividend to be declared, and a shareholders resolution in the case of a final dividend. Either way written resolutions are acceptable

3.Prepare dividend tax vouchers: This is the official document that provides the details of the dividend received by a shareholder and is a valid document when it comes his personal tax affairs.

4.Whilst preparing the dividend tax voucher one must check the number of shareholders listed on the register of members and the number of shares held by each of them on the date dividend is due (called the record date).

5.Dividend wavers: It is common for some shareholders to waive their entitlement to receive dividends. This must be checked to ensure that dividends are not paid to those who have waived their rights.

Once the dividends payments have been made adequate accounting entries will need to be posted to the accounts. It is common for director shareholders to have the dividend sum credited to the director’s loan account whereas for a shareholder the sum could be credited to ‘dividend payable account’.

Small Business Accountants

Micro-entities accounting and reporting

The Small Companies (Micro-Entities’ Accounts) Regulations 2013 came into force on 1 December 2013 and apply to accounting years ending on or after 30 September 2013. So a company that qualifies as a micro-entity can now prepare its accounts in compliance with these regulations if its accounting year ended on or after 30 September 2013.

What is a micro-entity?

A company will need to meet at least two out of the following three thresholds to qualify as a micro-entity:
• Turnover: Not more than £632,000
• Balance sheet total: Not more than £316,000
• Average number of employees: Not more than 10
The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Specifically excluded entities

An entity that is excluded from being a small company will not qualify as a micro-entity. Further, charities and LLPs are excluded so are investment undertakings, financial holding and insurance undertakings, credit institutions, qualifying partnerships, overseas companies, unregistered companies and companies authorised to register pursuant to s1040 of the Companies Act 2006.

Group situations

A parent company can only qualify as a micro-entity for the purposes of its individual accounts if it qualifies as a micro-entity individually and the group headed by it qualifies as small. Also, a parent company that prepares group accounts cannot qualify as a micro-entity for the purposes of its individual accounts.

Main features of micro-entity reporting

Simpler balance sheet and profit and loss account presentation as given below.. However, the director’s report requirements still apply.

Balance sheet format – option 1

A Called up share capital not paid
B Fixed assets
C Current assets
D Prepayments and accrued income
E Creditors: amounts falling due within one year
F Net current assets (liabilities)
G Total assets less current liabilities
H Creditors: amounts falling due after more than one year
I Provisions for liabilities
J Accruals and deferred income
K Capital and reserves

Balance sheet format – option 2

A Called up share capital not paid
B Fixed assets
C Current Assets
D Prepayments and accrued income


A Capital and reserves
B Provision for liabilities
C Creditors*
D Accruals and deferred income
*Aggregate amounts falling due within one year and after one year must be shown separately.

Profit and loss account format

A Turnover
B Other income
C Cost of raw materials and consumables
D Staff costs
E Depreciation and other amounts written off assets
F Other charges
G Tax
H Profit or loss

Tax Accountants