Failure to pay dividends to shareholders might be due to legitimate business reasons. However, there are occasions where dividend payments are wrongfully withheld. Whatever your situation, our team of experts are here to help.
What is a dividend?
A dividend is a payment made by a company to shareholders by way of a return on their investment. A dividend must be declared at a general meeting and can only be declared to shareholders if the company has made sufficient profit after payment of corporation tax.
Who can receive a dividend?
Dividends are paid to shareholders. Depending on the size of the company, it is common for directors to also be shareholders, and entitled to take dividends as well as salary if appropriate.
- In a small or medium sized business it is very likely that directors and shareholders are the same.
- In a larger business, it is more likely that there will be many shareholders, who are purely investors and do not take any executive role in the company.
When are dividends paid?
There is no particular period or limitation under company law during which a dividend should or shouldn’t be paid. However, dividends can only be paid when a company has made a profit. Larger companies tend to pay dividends to shareholders once or twice a year, but if a company is in profit it can announce a dividend at any time. Shareholders are paid dividends proportionate to their investment/shareholding in the business.
A dividend will be paid after corporation tax has been calculated, and cannot be classed as a business cost for tax purposes.
How are dividends issued?
A company, via its directors, must check that the balance sheet is healthy and that there is a profit in order to announce a dividend.
- The directors will then call a board meeting to declare a dividend.
- The declaration of dividends agreed in the meeting must be recorded in the minutes of the meeting for the purposes of the company books and records.
- Details of the current financial position, and the level of dividends declared should be recorded.
What are the benefits of paying dividends, versus salary?
In a small company where the directors and shareholders are the same it is usual for the directors to take tax advice on how best to be paid by the company. An accountant might suggest that the directors take advantage of the threshold limits for paying tax on salaries (PAYE and NIC) and the tax allowance on dividends, so that amounts paid to directors are paid via a mix of salary and dividends in order to fully maximise tax allowances.
Non declaration of dividends
There is no legal obligation on a company to declare dividends. Even if there are available profits for distribution, the directors may decide not to declare a dividend if this is not in the best interests of the company.
- this might be the case if the company needs to use the profits to fund more investment into the company, to ensure its success.
- as long as this does not breach their director’s duties, then this is a decision the directors are entitled to reach on behalf of the company.
Breach of duty and unfair prejudice claims
However, if the decision not to pay is taken in breach of duty, for an improper reason, then a shareholder might have recourse by bringing a claim that the failure to declare dividends is unfairly prejudicial to the shareholders.
Shareholders would have to be very clear that the decision-making behind the failure to declare a dividend is unfairly prejudicial and out of in line with the duties that the director has to the company.
- if the directors are taking excessive remuneration and making decisions about company funding that is not in the best interests of the company, while refusing to declare a dividend on profits year after year.
- a policy of not paying dividends is more likely to lead to a successful claim for example, than a one-off decision when the company requires the capital in other areas.
If an unfair prejudice claim is unlikely to be successful, then an alternative for the shareholder is to exit the company by selling their shareholding. This may be easier said than done depending on the size of the company and any pre-emption rights that may be in existence however.
Other remedies are available to a shareholder.
At Francis Wilks & Jones we advise both companies and shareholders on the rights to dividends, and remedies available for breach of duty. If you are a shareholder and believe that a company is exercising a policy of deliberately failing to declare a dividend, then contact one of our expert teams to today to discuss further. This is a complex issue. Speak to one of our team today if you have concerns.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.A shareholder we helped settle a dividend dispute