The Board and Shareholders should take advice on the level of dividends paid to the shareholders as there is a risk that some of the dividends may be classed as Illegal Dividends.
What is an Illegal Dividend?
Dividends can only be paid from distributable reserves, that is the accumulated profits of the Company. If and when all the distributable reserves have been paid to shareholders as dividends then any subsequent dividends paid to shareholders are classed as Illegal Dividends. In cases where there are Illegal Dividends and the Company enters into Liquidation or Administration, the appointed Liquidator or Administrator will request that the shareholders repay any Illegal Dividends. Some Accountants do not allow their clients to declare and pay Illegal Dividends and show the payment through the Director Loan Account causing the Loan Account to become overdrawn. Again, the Liquidator or Administrator will also ask the Director/Shareholder to repay any overdrawn Loan Accounts.
The importance of taking advice from RPG Business Recovery?
At RPG Business Recovery we spend time with the Board reviewing these types of transactions prior to taking instruction to place the Company into Administration or Liquidation. In some cases these payments can be resolved without causing any surprises once we have become Liquidator or Administrator.
At RPG Business Recovery, we have been contacted over recent months by Directors/Shareholders who have recently received demands from Liquidators for repayment of Loan Accounts and Illegal Dividends and we are always surprised that these issues were not raised and dealt with prior to their Insolvency Practitioner being appointed.
If you have any concerns regarding Illegal Dividends or overdrawn Director Loan Accounts then please contact us for a no obligation, confidential and free of charge meeting to discuss the options available to you.
Remember – only Licensed Insolvency Practitioners can assist you with formal insolvency appointments (this is a legal requirement) and are best placed to provide insolvency/debt advice. Licensed Insolvency Practitioners are highly regulated and have professional indemnity insurance. Unfortunately, there are a number of unregulated “debt advisors” advertising on the web that demand payment for their costs and then have to refer you to a Licensed Insolvency Practitioner for any formal insolvency who may also require payment and you could effectively end up paying twice unnecessarily. In our experience, many debt advisors provide poor or wrong advice and in some cases encourage Directors to break the law.
At RPG Business Recovery we are Licensed Insolvency Practitioners and also specialists in providing businesses with turnaround solutions including avoiding liquidation. Please feel free to contact us for a FREE no obligation meeting on 0161 608 0000 to discuss the options available to your company. You are also welcome to contact either Alan (Mobile 07580 885750 or email firstname.lastname@example.org) or James (Mobile 07717 001087 or email email@example.com) directly.
RPG Business Recovery is part of Royce Peeling Green Limited a firm of Chartered Accountants established over 100 years ago with offices in Manchester, London and North Wales. All Insolvency Practitioners at RPG Business Recovery are authorised and licensed by The Institute of Chartered Accountants in England and Wales.