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That thorny issue again - are Dividends illegal?

Published: 13/03/2019 By Lindsey Moore

We posted an article last summer on the issue of illegal dividends. This has been a “hot topic” in the insolvency world recently following a couple of recent decisions in the Court of Appeal.

The conclusions in these cases reinforce the advice given in our earlier article.

Directors should seek advice when paying dividends where there are insufficient distributable reserves or if the payment of a dividend may put the company into questionable solvency or at a real risk of entering insolvency; and/or it will reduce the assets which would otherwise be available to creditors.

Further, director-shareholders cannot simply hope to re-classify such dividends, for example as salary, at a later stage and will likely be required to repay them to the company in the event of a challenge.

Although the tax advantages of dividends over salary are clear, the most prudent approach for director-shareholders of companies with unascertained distributable reserves, regardless of whether the company is currently trading profitably, would be to take a salary rather than a dividend so as to avoid the issues which may arise.

Professional advice is important!