This article highlights some practical points that invariably arise when profits are extracted by way of dividends, although it does not purport to provide a definitive statement on the company law issues relating to dividends.
Valid payment of dividends—company law requirements
Payment of a dividend is usually governed by a company's Articles of Association. A final dividend must be recommended by the directors and approved by the company members in a general meeting. The directors may pay interim dividends if they are justified by the level of the company's distributable profit.
A company may not pay a dividend at all unless it has distributable reserves of a level at least equivalent to the amount of the dividend1. This is not necessarily profits of the current accounting period; it may include retained profits of an earlier accounting period. The ability to pay a dividend may therefore be inhibited where the company (perhaps temporarily) is making losses, whereas salary can always be paid, assuming that there is sufficient funding. In recommending a dividend, the directors
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