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Introduction to this document

Distribution flow chart

A company doing well will usually be expected to make distributions to its shareholders. Our flow chart takes you through the process of assessing whether a distribution can lawfully be made.

What is a distribution?

“Distribution” is the general term for payments made by a company to its shareholders based on their shareholdings. The most common form of distribution is a dividend. As distributions reduce a company’s assets, the Companies Act 2006 sets out the circumstances in which they are allowed. Any unlawful distributions must be repaid and could lead to directors being held personally liable, so it’s important to get it right.

Financial position

To ensure that a company can afford to make a distribution, the directors have to look closely at their accounts. These must show that the company has sufficient “distributable profits”, which are accumulated, realised profits (not already used) less the accumulated, realised losses (not already written off).

A company needs to start by looking at its last annual accounts. If the auditor’s report is qualified, the company will have to obtain a statement from its auditor as to whether or not the qualification is material. If the annual accounts show insufficient distributable profits, or the auditor’s qualification is material, the company can then use interim accounts to assess the company’s current position. If the interim accounts show that there are sufficient distributable profits, the company can proceed.

If the company was recently incorporated and it has not yet produced accounts for its first accounting period, “initial accounts” can be used to check its financial position.

Other factors

After making sure that the company can afford to make a distribution, the directors will have to check the articles for their basic authority to declare and pay dividends and the procedure for doing so. They must also ensure that making the distribution is in the best interests of the company and that they are abiding by their general and fiduciary duties.