The below article will provide some guidance on the procedures and some practical issues involved in making dividend payments by the directors of small limited companies.
Procedure for valid dividend payment?
The company’s Articles of Association govern the payment of dividends. There are essentially/mainly two types of dividends:
– Final dividends
– Interim dividends
Final Dividend
A final dividend is the dividend declared by a company after the year-end when the company has issued its full years financial statements, declared by the company’s board of directors, normally at the annual general meeting (AGM).
Once the dividends are approved at the AGM, a final dividend creates a binding obligation on the company to pay the dividend, regardless of when the payment is actually made. The effective date of the final dividend, therefore, will be the date of the shareholder resolution.
Procedure for the payment of final dividend is as follows:
– Establish the accumulated profits of the company
– Determine the total amount of dividends to be paid and calculate the dividend payable per share
– Either prepare AGM or EGM documents recommending a dividend for the members to approve at the meeting or prepare and circulate an elective resolution to the members approving the final dividend
– Make payment to the shareholders and issue them dividend vouchers
Interim Dividend
Interim dividend is the dividend that has been both declared and paid before a company’s year-end i.e. before the finalisation of year-end accounts.
Interim dividend does not generally create an obligation on the company to pay a dividend and therefore can be revoked by the directors before it is paid. Interim dividend, therefore, creates a right for the shareholder when it is paid.
Procedure for the payment of interim dividend is as follows:
– Establish the accumulated profits of the company
– Determine the total amount of dividends to be paid and calculate the dividend payable per share
– Hold a board meeting and prepare minutes approving the dividend payment
– Make payment to the shareholders and issue them dividend vouchers
Record keeping
When a company declares a dividend, it is first important to follow the procedures above. The minimum documentation requirements are to prepare dividend vouchers and minutes of the board meeting approving the dividends.
When the dividend is unlawful, illegal or ultra vires?
Ultra vires literally means beyond the power. Therefore, an unlawful, illegal or ultra vires dividend means such dividend, which was not in the power of the directors to declare.
If the accumulated profits or distributable reserves of the company are not sufficient to pay all shareholders a dividend, the dividend may be technically illegal.
Disclaimer
The information provided by Martax Accountants is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information.
