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If you can’t afford to pay dividends to directors and shareholders, assess your financial position with the help of a licensed insolvency practitioner to tackle the root of the problem. If you take dividends when your company can’t afford it, the consequences can be severe, including court action, director disqualification, and personal liability.
If you are struggling to pay dividends to directors and shareholders, this may indicate widespread financial problems and potential insolvency. Cash flow problems can seriously damage company health and impair your ability to maintain company operations and cover essential payments, such as staff wages, HMRC taxes, and company creditors.
Company directors and shareholders are remunerated for their investment and hard work through dividends; however, when there’s no cash left in the business to cover dividend payments, this raises alarm bells. We look at what you can do if you can’t afford dividends.
If you can’t afford dividends, you must consider the overall financial position of your company. A licensed insolvency practitioner can advise on what’s fuelling financial problems and secure future dividend payments.
Suspend dividend payments - If you can’t raise enough cash to cover dividends, you may suspend or delay dividend payments until the company has sufficient funds. This can provide the company with ample time and breathing space to get financial affairs in order and formulate a plan with a licensed insolvency practitioner.
Seek qualified insolvency advice - If you cannot afford dividends and require professional advice on how to improve the financial position of your company to cover dividend payments, seek qualified advice from a licensed insolvency practitioner.
They may consider ways to negotiate company debts to increase cash flow, such as a Time to Pay arrangement or a Company Voluntary Arrangement (CVA). Company finance may provide an essential cash flow boost, unlocking funds to cover dividend payments. Company Administration may also be considered to improve efficiency and make company cash go further.
If you continue taking dividends when the company can’t afford it, the dividend payments will be classed as unlawful, for which the consequences are serious. The Companies Act 2006 specifies when dividends can be paid to directors and shareholders.
The company must have sufficient reserves to provide a cushion during periods of slow trade, which is common as seasons and trends change. However, if these reserves are emptied to cover dividend payments, company finances will be at risk. If the financial position of the company is compromised due to unlawful dividends, you could be found guilty of director misconduct.
If you are found guilty of director misconduct, the consequences could include:
Personal liability - You could be held personally liable for company debts. If you can’t fund this personally, you run the risk of being made bankrupt.
Court action - Company creditors or the company liquidator can launch legal action to recover repayments. If creditors suspect that your company is insolvent, they may attempt to push your company into compulsory liquidation by issuing a winding up petition.
Director disqualification – If your behaviour is unfit, you could be disqualified as a company director under the Company Directors Disqualification Act 1986 (CDDA).
As a company director, you must act in the best interests of company creditors. If you put the interests of directors and shareholders first by taking dividends when the company cannot financially support this, the consequences can be serious.
If your company is unable to pay dividends to directors and shareholders, contact a licensed insolvency practitioner for immediate advice. More options will be available the earlier you seek help, so it’s vital to act without delay. We offer a free, confidential consultation through our dedicated advice line or arrange a meeting at any of our 100+ offices across the UK.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
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