| 2.
Restrictions on Dividends |
| A
private or public company may only make distributions
out of its profits available for distribution. These are
its accumulated, realised profits so far as not previously
distributed or capitalised, less its accumulated, realised
losses so far as not previously written off in a reduction
or reorganisation of capital (s263 CA 85) |
| A
public company may only make a distribution so long as
the company's net assets do not fall below the aggregate
of its called up share capital and 'undistributable reserves'.
Thus, for public companies, any excess of unrealised losses
over unrealised profits must be covered by realised profits
(s264 CA 85). |
| These
tests are applied by reference to relevant accounts complying
with specified requirements (usually the last audited
accounts but if they do not show sufficient distributable
profits interim accounts may have to be drawn up) (s270
CA 85). The definition is very wide and could cover any
benefits in cash or in kind. However, the following are
expressly excluded and are therefore not caught by the
restrictions: |
| (i) |
an
issue of shares as fully or partly paid bonus shares; |
| (ii) |
the
redemption or purchase of any of the company's own shares
otherwise than out of distributable profits; |
| (iii) |
certain
reductions of share capital |
| (iv) |
distributions
in a winding-up. |
| In
addition to satisfying the statutory tests when considering
whether a dividend can be paid, the directors of a company
must have regard to the company's best interest generally
(e.g. by having due regard to the future cash requirements
of the business and to the present and future solvency
of the company). |
| Dividends
must not be paid out of share capital. |
