If a company is unable to afford to pay dividends to its directors and shareholders, there are a few options available. One option is to reduce or eliminate the dividend payouts until the company’s financial situation improves.
Another option is to raise additional capital through issuing new shares or borrowing, which can then be used to pay dividends. It may also be necessary to revise the company’s business plan and make changes to improve profitability. Another option is to communicate transparently with the shareholders and directors, and to find the best solution together, the company may consider the possibility of paying dividends in shares or other forms of compensation.
It’s important to remember that the company’s ability to pay dividends is not only based on its current financial situation, but also on its future prospects and growth potential.
This can provide a way for them to increase their ownership stake in the company and potentially earn a larger return in the future. Whether you’re a shareholder or director, it’s important to understand how dividends are paid and how they can impact your financial position.
But what happens if you can’t afford to pay a dividend to directors or shareholders
What happens when a company cannot pay dividends to shareholders?
If a company cannot pay dividends to shareholders due to there being insufficient funds within that company, and not in a position to make dividend payments to its shareholders. It means that if a payment of dividends is made when insufficient profits exists could mean these as classed as ‘unlawful dividends’ and the consequences for you as director could be severe.
What to do if your company cannot afford to pay dividends
If your company cannot afford to pay dividends, The Companies Act, 2006, clearly states 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 payment of dividends are covered by rules and regulations in order to protect companies and their creditors, so paying a dividend may be deemed unlawful if the business fails in the future.
You may be worried that shareholders will remove their investment if the company cannot pay dividends, but what you should really worry about is whether they’ll continue to stay in business and how this affects your employees. If a firm doesn’t have enough money for both its growth as well investing back into it then things might get messy; however there are always solutions – even ones where everyone wins!
What happens if I can’t afford to pay dividends to directors and shareholders?
The most important thing to consider when receiving a dividend is the risk that comes with it. If you pay one regardless of whether or not your company can afford them, then there’s no guarantee as an investor for how much return on investment (ROI) will be received by those who invest in such ventures and this could cause any shareholder interested only at regular dividends from their investments decide otherwise due sale once word gets out about potential poor financial glad tidings ahead!
Failing to comply with the Companies Act can lead not only towards charges of misconduct but also danger for both your company and its creditors.
When you invest in a company, it’s not just about making money – although that is important too! You also want to keep your investments safe. If the board of directors cannot agree on how best spend any dividends paid out by them because they were spent already or put into some other project before being paid back…well then what happens when there are no more payments coming?
Potential ramifications for paying dividends when you can’t afford them
The directors who sanctioned the payment of dividends when they couldn’t be supported by company faced a prospect that could hold them personally liable for any debts resulting from such an action.
Dividends are not always tax-free. If the company has to be liquidated and its cause of decline is traced back illegal dividends, then creditors could pursue you through legal proceedings for repayment
Should the company fall into liquidated and the cause of decline for the business failure is traced back to illegal dividends, the liquidator and/or company creditors could pursue you through the courts for repayment.
There may also be further ramifications such as the Company Directors Disqualification Act, 1986, (CDDA) if ‘unfit behaviour’ is proven, and this could result in a ban from being a director for up to 15 years.
So what action can be takes ignorer to return your company return back to a stronger financial position, and be able to pay dividends to other directors, shareholders and yourself?
As dividends are taken from the profit of a company, the focus should be aligned with improving profit levels should be a key factor.
What to do if your company can’t afford to pay dividends
Carry out an insolvency test
Directors should always carry out an insolvency test on the business should they be unable to pay dividends to directors and shareholders of that business. If you are unsure about the outcome of the test we advise to seek guidance from a licensed insolvency practitioner (IP) in this respect as they can also guide you on your next steps.
If it is found that the business is insolvent, as a director 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
In order to improve profit levels, businesses need to focus on increasing revenue while simultaneously decreasing costs. One way to increase revenue is to expand into new markets. This can be done through marketing campaigns that target new demographics or by offering new products and services that appeal to a wider audience.
Another way to boost revenue is by improving the quality of your products or services. This can lead to repeat customers and positive word-of-mouth reviews, both of which can help to attract new business. When it comes to cutting costs, businesses need to take a close look at their expenses and see where they can make cuts.
This might involve renegotiating contracts with suppliers, downsizing the workforce, or making other operational changes. By taking these steps, businesses can improve their bottom line and achieve lasting success.
Directors that are seeking reliable professional advice when your company can’t afford to pay dividends to its directors and shareholders, please contact one of our experts. We operate an extensive network across the country, and can offer you a free consultation.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.