262 17: Capital maintenance and dividend law Part E Capital and the financing of companies
A public company may only make a distribution if its net assets are, at the time, not less than the
aggregate of its called-up share capital and undistributable reserves. The dividend which it may pay is
limited to such amount as will leave its net assets at not less than that aggregate amount.
Undistributable reserves are defined as:
(a) Share premium account
(b) Capital redemption reserve
(c) Any surplus of accumulated unrealised profits over accumulated unrealised losses (known as a
revaluation reserve). However a deficit of accumulated unrealised profits compared with
accumulated unrealised losses must be treated as a realised loss
(d) Any reserve which the company is prohibited from distributing by statute, its constitution or law.Illustration^
(^)
Suppose that a public company has an issued share capital (fully paid) of £800,000 and £200,000 on
share premium account (which is an undistributable reserve). If its assets less liabilities are less than £1
million it may not pay a dividend. If however its net assets are say £1,250,000 it may pay a dividend but
only of such amount as will leave net assets of £1 million or more, so its maximum permissible dividend
is £250,000.
The dividend rules apply to every form of distribution of assets except the following
The issue of bonus shares whether fully or partly paid
The redemption or purchase of the company's shares out of capital or profits
A reduction of share capital
A distribution of assets to members in a winding up
You must appreciate how the rules relating to public companies in this area are more stringent than the
rules for private companies.
3.4 Relevant accounts
The profits available for distribution are generally determined from the last annual accounts to be
prepared.
Whether a company has profits from which to pay a dividend is determined by reference to its 'relevant
accounts', which are generally the last annual accounts to be prepared.
If the auditor has qualified their report on the accounts they must also state in writing whether, in their
opinion, the subject matter of their qualification is material in determining whether the dividend may be
paid. This statement must have been circulated to the members (for a private company) or considered at a
general meeting (for a public company).
A company may produce interim accounts if the latest annual accounts do not disclose a sufficient
distributable profit to cover the proposed dividend. It may also produce initial accounts if it proposes to
pay a dividend during its first accounting reference period or before its first accounts are laid before the
company in general meeting. These accounts may be unaudited, but they must suffice to permit a proper
judgement to be made of amounts of any of the relevant items.
If a public company produces initial or interim accounts they must be full accounts such as the company
is required to produce as final accounts at the end of the year. They need not be audited. However the
auditors must, in the case of initial accounts, satisfy themselves that the accounts have been 'properly
prepared' to comply with the Act. A copy of any such accounts of a public company (with any auditors'
statement) must be delivered to the Registrar for filing.
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