Require Immediate Support? Free Director Helpline: 0800 644 6080

Real Business Rescue

Free Director Helpline: 0800 644 6080

I’ve taken too much dividend from my company and it's now insolvent

Share:

Updated:

Written by: Jonathan Munnery

What should company directors do if they overpay dividends, also known as 'illegal dividends'?

If you've taken an 'illegal dividend' which includes taking too much dividend, you could be held personally liable for company debts, face director disqualification or receive a fine. Dividends must only be paid if sufficient distributable profits are available in the business.

What to do following an illegal dividend

When a company becomes insolvent the ‘veil of incorporation’ that separates its directors from the business can be removed, and a significant risk emerges of personal liability for some or all of the monies owed.

This risk can materialise if you’ve taken too much dividend from your company in the past, but particularly if it’s linked with the business’ financial decline and insolvency. This situation may be revealed if an administrator or liquidator is appointed, and they identify instances where unlawful dividends have been taken, or investigate the causes of insolvency.

The money taken via dividends that are later deemed unlawful is an asset of the business and can be reclaimed by the insolvency practitioner (IP) for the benefit of creditors. It’s one of the debts owed to the business, and as such, they cannot ignore it.

 

background curve

Take Our Free 60 Second Test

Get an instant understanding of your:

  • Debt and Asset Position
  • Formal Insolvency Options
  • Next steps

Plus much more ...

Start The 60 Second Test
apps on mobile screen

Taking too much dividend from your company

When you declare a dividend it must be financially supportable by the business. This means there must be sufficient distributable profits available to cover the sum, otherwise the dividend will be regarded as illegal or unlawful.

Taking an illegal dividend is a serious issue in itself, but when the company is also facing insolvency, the consequences for directors can be severe. It’s a director’s duty to know where their company stands financially at all times, so claiming no knowledge of its insolvent position simply alerts officials to a potentially deeper problem.

Is your company insolvent?

If your company is insolvent you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
The team are available now -  0800 644 6080

60 Second Test Find Your Nearest Office

What are the potential consequences of taking too much dividend?

There are a number of serious ramifications for directors in this situation. If insolvency is directly related to taking too much dividend from the company, you face penalties and sanctions, including disqualification as a director and personal liability if you cannot afford to pay the money back.

You may also face a hefty tax bill if HMRC decide to charge income tax and National Insurance on the amounts you’ve taken, plus the prospect of wrongful trading allegations if you’ve continued to trade whilst insolvent.

Can’t pay CBILS or Bounce Back Loan?

Don't worry - there are thousands of other company directors in the same position. If you are struggling to keep up with your Covid loan repayments, speak to a member of the Real Business Rescue team to discuss your options. It's Free & Confidential.
The team are available now -  0800 644 6080

Can unlawful dividends be reversed?

Although dividends are a tax-efficient way to extract funds from a company, it’s vital to carry out the necessary checks and adopt the correct procedures prior to declaring one. It’s easy to declare dividends in the belief that the company can support them, when in reality there may be other financial outgoings pending that you haven’t considered.

Rectifying an unlawful dividend is a process for the appointed office-holder during the course of their investigations. If they determine that one or more dividend payments were taken when the company didn’t have available distributable profits, they’ll take the necessary steps to reverse the dividends.

If shareholders have received unlawful dividends and they aren’t obliged to repay the money, you and other directors will be pursed for repayment so the company can use the money to repay its creditors. This introduces the possibility of personal bankruptcy if you can’t afford to pay from your personal funds.

Illegal dividends and insolvency – what should you do?

Following a strict protocol when declaring dividends, including diligently recording the figures and decision-making processes, helps you mitigate the risks as a director and protect yourself from personal liability.

A director’s duty is to promote the success of the company, and taking an illegal dividend can be seen as failing in this duty. You’ll also face questions surrounding your knowledge of the company’s financial position, i.e. whether you knew or should have known that it was approaching insolvency.

Need to speak to someone?

If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080

There’s much at stake when your company is insolvent and illegal dividends are a factor, and you need to obtain professional assistance as soon as you can. You’ll be able to find out more about the threat of personal liability, identify your options and those for the company, and establish the best way forward.   

Real Business Rescue are insolvency specialists. Our partner-led team will provide independent advice on your situation, and offer valuable support at this worrying time. Please contact one of the team to arrange a free same-day meeting – we work from an extensive network of offices throughout the UK.

reviews io logo

Real Business Rescue are here to help

Still unsure whether liquidation is right for your company? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners will take the time to understand the problems your company is facing before recommending the best course of action going forward based on your own unique circumstances.

  • UK’s Largest Liquidators
  • 100+ Offices Nationwide
  • 100% Confidential Advice
  • Supported 25,000+ Directors
Meet The Team
Team Of 4

Team of Qualified Experts

Trusted team of experts on hand to assist

Meet The Team
Rbr Accreditations Blue

Looking for immediate support?

Complete the below to get in touch

Here at Real Business Rescue we take your privacy seriously and will only use your personal information to contact you with regards to your enquiry. We will not use your information for marketing purposes. See PRIVACY POLICY
10,000+ Tests Completed

Free 60 Second Test

For Ltd Company Directors

Get An Instant Understanding Of Your:

  • Debt and Asset Position
  • Director and Liability Review
  • Next Steps

Plus much more ...

Real Business Rescue Recommended
  • UK's leading business funders
  • Free Brokerage Service
  • Full Market Access
  • Over 30 years' experience
  • Strong relationships with HMRC
  • Support from start to finish
  • 10,000 potential buyers
  • 12,000+ Businesses Sold
  • 60+ Years Experience
Next Steps

We provide free confidential advice with absolutely no obligation.
Our expert and non-judgemental team are ready to assist directors and stakeholders today.