Dividends and Distributions

Many companies will now be considering paying dividends or making other distributions, for example following a 31 December year-end or in anticipation of a 31 March or 5 April year-end. This article seeks to explain the basic legal principles relating to dividends and distributions, notes certain recent developments in the accounting field which have an impact and concludes by addressing some practical issues which fall to be considered. For the purposes of this article, we have not addressed the tax implications relating to dividends and distributions.

It is a fundamental principle of company law that a company should maintain its capital and that capital can only be extracted and returned to shareholders in a limited number of ways. One such way is through the payment of a lawful dividend or the making of a lawful distribution. Section 263(2) Companies Act 1985 (the "Act") defines "distribution" as meaning (subject to four specified exceptions) "every description