Earlier this month it was reported that shareholders in a FTSE250 company voted down the company’s proposal to pay a £27 million dividend. Previously there had been criticism in the media of the proposed dividend as the company were furloughing staff and seeking to reduce worker’s pay.
The decision of the shareholders to vote down their proposed dividend is striking. The dividend was to be the final dividend of 2019 and the company had made the proposal considering the company’s first quarter performance. It is certainly an unusual move by the shareholders but clearly shows that in the current situation such decisions will need to be considered carefully no matter what the size company.
Various government schemes are in place at the moment to offer financial assistance to companies, however the assistance is limited for many directors of small companies who take only a small salary and then received a dividend to top this up.
Just as in normal times a company can only pay a dividend out of distributable reserves, broadly speaking realised profits which have been allocated for the payment of the dividend. When declaring a dividend directors are duty bound to consider their duties to the company and its solvency. What may have been a successful business prior to the current crisis many now be experiencing new and unusual issues with declining sales and an uncertainty as to when trading will resume.
When considering if a dividend is appropriate the same rules still apply as they did before the current pandemic and even though the Government have announced a suspension of the wrongful trading provisions the payment of an illegal dividend now could still lead to a director being personally liable under the misfeasance provisions of the Insolvency Act.
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