Procedures on Declaring Dividends for Owner Managed Companies

For owner managed companies, like those we represent, it becomes a grey area to understand the legal steps one must take to organise dividends from their company.

For many clients, dividends are just those things that either you take charge of if you’re au faux with what drawings you want to take, or you lean on your accountant for instance to see how much company reserves are available for a dividend.

Here is a reminder of the formal dividend procedures laid out by law:

• The payment of a dividend is governed by a company’s Articles of Association – you can check your articles on Companies House. Most companies (unless trading for a long time) will have the model articles. Model articles state dividends can be declared by Ordinary Resolution (i.e. more than 50% of the voting rights), achieved by either a poll or a show of hands at a meeting, or written resolution without a meeting (i.e. all Directors sign separately without a meeting)

• However, there are 2 dividend types:
• 1. Final dividends – paid once per year after the end of each year. The dividend is due and payable on the date of the resolution unless some future date for payment is specified. This is typical of a PLC.
  2. Interim dividends – paid throughout the financial year, the date of payment considered the date of entry in the company’s books (CTM 15205).
     • In many small private companies, the directors and shareholders are identical, and dividends are often credited to the directors’ or shareholders’ account with the company.
     • Payment is not made until such a right to draw on the dividend exists, expected to be when the appropriate entries are made in the company’s books.
     • The model articles do not say that the directors must make their decision at a board meeting.

In Burnden Holdings v Fielding, the Liquidator argued that interim dividends made were not lawful because the correct procedure had not been followed. The Liquidator argued that strict compliance with the procedure was required for the dividend to be lawful, and that the procedure was:

• A board meeting had to be convened to recommend the dividend
• That the accounts being considered by the directors had to be the company’s accounts in the sense of being adopted by the company
• That the directors actively consider the relevant accounts to conclude there are sufficient distributable profits to enable the dividend to be declared
• That the directors then recommend the dividend

The Judge rejected the Liquidator’s arguments. No such formality is required under the Act and in particular there is no requirement for the company’s interim accounts to be “laid” before the company through a formal meeting of its directors (in contrast to annual accounts). The judge made it clear that the directors must still actively consider the accounts and satisfy themselves there are sufficient distributable reserves. Practically, accounts must be available to all directors to declare the dividend. It’s not mandatory for the directors to form a meeting to consider the accounts together. However, the interim dividends before a liquidation could have their legitimacy questioned if concern is raised that any of the directors didn’t see the accounts before the dividend or the interim dividend didn’t receive the required voting majority to pass.

Practical considerations for owner-managed companies on paying dividends:

• You should keep your bookkeeping up to date whether you use Xero, Sage, Quickbooks etc.
• All directors should review the interim accounts held in the bookkeeping software, i.e. profit and loss account and dividends
• Either
  • make company bank payment to shareholders for dividends, or
  • make a dividend journal posting a debit interim dividend and crediting the Director’s Loan Account (assuming they’re also a Director), if you don’t want to receive a dividend payout at that time
• Once financial accounts have been prepared, there may be amendments required:
  • If the interim dividends exceeds the distributable reserves, a failed dividend occurs and the postings to the DLA must be reversed as to maintain positive reserves or any cash drawings without the interim dividend may move the DLA into an overdrawn position for which S.455 and interest charges to avoid benefit in kind implications must be considered.
  • The directors may wish to make a final dividend based on the last annual financial accounts for which the appropriate formal procedures must be followed. However, the date of a final dividend would be in the following financial year, and therefore owner managed companies may wish to continue issuing interim dividends to avoid the formalities and legalities of a final dividend.

When should an owner managed company consider using final dividends?

• When there is a distinction between company directors and shareholders
• When shareholders are interested in a level of dividend payout (yield) from each financial year, a final dividend would attribute the payout to the performance of the prior year regardless of the official dividend date.
• When shareholders are interested in a high level or corporate behaviour such as large investors or group companies.