The BCR Insolvency Blog

Directors Should Exercise Caution When Distributing Profits Through Dividends

Posted by Chris Knott on 09-Mar-2017 10:25:00

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Confusion can easily be created when directors are considering dividend payments. The Companies Act 2006 stated that distributions can only be made from “profits available for the purpose”, these being “accumulated, realised profits…less accumulated realised losses”.

Given changes to UK GAAP, most significantly, the introduction of FRS 102, the ICAEW jointly issued a revised draft of its technical guidance with ICAS for consultation in 2016.

The confusion can arise, sometimes, as to what “realised” actually means, and the increased focus on fair value accounting within FRS muddies the waters.

By putting an increasing number of ‘unrealised’ gains and losses through the profit and loss, such as fair value movements on financial instruments or investment properties, FRS 102 runs the risk of confusing the position.

Some directors may think that anything that goes through the profit and loss account is realised, and therefore can be distributed.

This is a problem in insolvency proceedings. An illegal dividend could potentially be recovered from the shareholders or possibly personally from the directors (as they declare the dividend). This liability could arise regardless of whether the directors themselves received the dividend.

Directors need to exercise caution when it comes to drawing up their plans to distribute funds.

Please feel free to call Chris Knott for further advice on this issue or email him on ck@bcr-insolvency.co.uk

Topics: News

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