Can’t afford to pay dividends to directors and shareholders

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What to do if your company cannot afford to pay dividends

The Companies Act, 2006, lays down the circumstances in which dividends can be paid, and a key issue is that sufficient realised distributable reserves exist within the business prior to payment.

The rules and regulations surrounding the payment of dividends are specific, and intended to protect companies and their creditors, so it’s a risky decision to pay dividends when they may be deemed unlawful if the business fails in the future.

If your company can’t financially support dividend payments you may be worried that shareholders will remove their investment, so what might happen under these circumstances and is there anything you can do to help the situation?

What happens if I can’t afford to pay dividends to directors and shareholders?

If a shareholder has invested in the company with a view to receiving regular dividend payouts, failing to receive the anticipated return may result in the sale of their shares. The problem is that if you pay a dividend regardless of the company’s financial position, the risk to you as a director is significant.

Failing to comply with the Companies Act can result in accusations of misconduct and if taking a dividend endangers the company or its creditors at the time of payment or later on, it’s likely to be viewed as a breach of director fiduciary duty.

It may be the case that shareholders withdraw their investment in the company due to the non-payment of dividends, but if you look at the broader picture, paying dividends the company cannot support is a huge risk to you personally.

Potential ramifications for paying dividends when you can’t afford them

Directors who sanction the payment of dividends when they can’t be supported by the company face the prospect of being held personally liable for the company’s debts resulting from the payment.

If the company has to be liquidated and the cause of decline is traced back to illegal dividends, the liquidator and/or company creditors could pursue you through the courts for repayment.

Furthermore, the Company Directors Disqualification Act, 1986, (CDDA) may come into play if ‘unfit behaviour’ is proven, and this could result in a ban from being a director for up to 15 years.

So what can you do to help your company return to a stronger financial position, and be able to pay dividends to yourself, other directors, and shareholders? Dividends are taken from the profits of a company, so focusing on improving profit levels should be a key focus.

What to do if your company can’t afford to pay dividends

Is the company insolvent?

If you can’t afford to pay dividends to directors and shareholders you need to establish whether the company is insolvent. It’s highly advisable to seek guidance from a licensed insolvency practitioner (IP) in this respect as they can also guide you on your next steps.

If you are insolvent, your options may include restructuring your debts via company administration or a Company Voluntary Arrangement (CVA), or perhaps securing additional funding to boost working capital.

Improving profit levels

Making several small changes in your business can significantly improve your overall profit levels - these might include cutting costs and minimising inefficiencies, for example. You may also be able to negotiate lower prices with your suppliers, or review your own pricing structure to increase your profit margins.

For reliable professional advice when your company can’t afford to pay dividends to its directors and shareholders, please contact one of our experts at Real Business Rescue. We operate an extensive network of offices nationwide, and can offer you a free same-day consultation.