UK: Dividends and Distributions

Last Updated: 31 March 2004
Article by Jonathan Deverill

Many companies will now be considering paying dividends or making other distributions, for example following a 31 December year-end or in anticipation of a 31 March or 5 April year-end. This article seeks to explain the basic legal principles relating to dividends and distributions, notes certain recent developments in the accounting field which have an impact and concludes by addressing some practical issues which fall to be considered. For the purposes of this article, we have not addressed the tax implications relating to dividends and distributions.

Legal Principles

It is a fundamental principle of company law that a company should maintain its capital and that capital can only be extracted and returned to shareholders in a limited number of ways. One such way is through the payment of a lawful dividend or the making of a lawful distribution. Section 263(2) Companies Act 1985 (the "Act") defines "distribution" as meaning (subject to four specified exceptions) "every description of distribution of a company’s assets to its members, whether in cash or otherwise"; this includes dividends and so the Act and, hereafter, this article do not refer separately to dividends.

The Act sets out what assets a company is permitted to distribute and contains additional rules which apply only to public companies. Section 263(1) of the Act states that a company may only make a distribution out of profits available for that purpose ("distributable profits"). These are the company’s accumulated, realised profits (so far as not previously distributed or capitalised) less its accumulated, realised losses (so far as not previously written off in a reduction or reorganisation of its share capital). As noted in Part 2 below, the identification of "realised" profits and losses is a matter of both law and accounting practice.

For public companies, section 264 of the Act imposes an additional requirement. A public company may only make a distribution at any time:

(a) if at that time the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves; and

(b) if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate.

There are additional requirements for insurance and investment companies which are outside the scope of this article, as are certain special provisions which apply to distributions by banking companies. Section 281 of the Act states that the statutory provisions of the Act relating to distributions are without prejudice to any enactment or rule of law, or any provision of a company’s memorandum or articles, restricting the sums out of which, or the circumstances in which, a distribution may be made. It should be borne in mind that, as a result of the Aveling Barford decision, a sale at an undervalue by a company to its parent or a sister subsidiary could be treated as a distribution for the purposes of the Act.

Whether a company can make a distribution at a particular time also depends upon the position as shown by the company’s accounts. For this purpose, it is necessary to refer to the company’s own individual accounts; it is irrelevant whether, on a consolidated basis, any group in which the company is included has sufficient distributable profits.

In accordance with section 270(2) of the Act, the amount of a distribution which may be made is to be determined by reference to the following items as stated in the company’s individual accounts:

(a) profits, losses, assets and liabilities;

(b) provisions of any of the kinds mentioned in paragraphs 88 and 89 of Schedule 4 to the Act (depreciation, diminution in value of assets, retentions to meet liabilities, etc.); and

(c) share capital and reserves (including undistributable reserves).

The Act also identifies which accounts of the company are relevant for this purpose. These will be the last audited annual accounts of the company, except that:

(a) where the distribution is proposed to be declared during the company’s first accounting reference period, or before any accounts are laid in respect of that period, one instead refers to "initial accounts" of the company; and

(b) where the last annual accounts show insufficient distributable profits, or an insufficient level of distributable profits taking account of distributions made since the preparation of those accounts, one instead refers to "interim accounts" of the company.

When reliance is placed for this purpose on the last audited annual accounts of the company, under section 271 of the Act those accounts must (amongst other things) have been properly prepared in accordance with the Act and show a true and fair view of the state of the company’s affairs as at the balance sheet date and of the company’s profit or loss for the relevant accounting period. In addition, the auditors must have reported on those accounts and, if their report is qualified in any way, they must state in writing whether the matter by reference to which their report is qualified is material for determining whether the distribution can lawfully be made; and a copy of the auditors’ statement must be laid before the company in general meeting.

Private companies using initial or interim accounts to justify a distribution need only ensure that such accounts enable the directors to determine whether that distribution can lawfully be made by reference to the matters set out in section 270(2) of the Act (referred to above) and, therefore, a decent set of management accounts may be sufficient for this purpose. In the case of public companies, however, additional requirements are imposed for both interim and initial accounts. One of these is that the set of accounts prepared must show a true and fair view of the state of the company’s affairs as at the balance sheet date and of the company’s profit or loss for the period for which such accounts are made up.

2. Accounts And Accounting Principles – An Evolving Relationship

As mentioned in Part 1 above, the identification of "distributable profits" is determined by reference to both legal and accounting principles. We have already seen that "distributable profits" are calculated using a company’s "realised profits" and "realised losses"; and, by section 262(3) of the Act, "realised profits" and "realised losses" are profits and losses of the company "as fall to be treated as realised in accordance with principles generally accepted, at the time when the accounts are prepared, with respect to the determination for accounting purposes of realised profits or losses".

Following a consultation process, new guidance on the determination of realised and distributable profits (and losses) under the Act was issued in March 2003 by The Institute of Chartered Accountants in England and Wales and The Institute of Chartered Accountants of Scotland, in a document entitled "Tech 7/03 – Guidance on the Determination of Realised Profits and Losses in the Context of Distributions under the Companies Act 1985" ("Tech 7/03"). Tech 7/03 supersedes Technical Releases 481 and 482, issued in September 1982.

In summary, Tech 7/03 defines a "realised profit" as a profit arising in one of several situations, including:

(a) on a transaction where the consideration received is "qualifying consideration" (broadly, cash or certain types of cash-equivalent, such as an asset for which there is a liquid market) or as a result of some other event which results in the company receiving "qualifying consideration" without itself giving consideration;

(b) profits arising from use of the "mark to market" method of accounting, where it is proper for the company to adopt that method;

(c) profits arising on an unrealised profit becoming realised in certain circumstances or on the reversal of a loss previously regarded as realised; and

(d) following certain reductions or cancellations of capital by a company.

In contrast, Tech 7/03 requires all losses to be treated as realised except where law, accounting standards or Tech 7/03 otherwise provide. Tech 7/03 notes that certain published accounting standards require certain specific events to be treated in a certain way as regards their impact on the realisation (or otherwise) of profits or losses. When determining whether a company has a realised profit, transactions and arrangements must be looked at as a whole, particularly if they are artificial, linked or circular. It therefore follows that intra-group transactions should be looked at carefully and further guidance on that is set out at Appendix A to Tech 7/03.

Certain sections of the Act contain specific rules which affect whether certain profits or losses can be treated as realised. These include:

(a) section 263(4) – a company must not apply an unrealised profit in paying up debentures or any amounts unpaid on its issued shares;

(b) section 275 – contains several rules, including one to the effect that, save as provided in that section, most provisions in a company’s accounts must be treated as a realised loss for the purpose of calculating a company’s distributable profits; and

(c) section 276 – where a company makes a distribution of or including a non-cash asset, and any part of the amount at which that asset is stated in the accounts by reference to which the distribution is made represents an unrealised profit, that profit is treated as a realised profit when determining, in particular, whether the distribution in question can lawfully be made.

3. Some Practical Considerations

The legal and accounting principles described in Parts 1 and 2 above are relevant in determining whether a company can make a distribution and, if so, by reference to which items in which set of accounts. However, companies wishing to make a distribution should also have regard to a number of considerations of a more practical nature and some of these are described in more detail below.

A company should not make a distribution to its members unless it is in the company’s best interests to do so. In assessing this, the directors should take into account, amongst other things, the consequences of the distribution for the company’s solvency and cash-flow. It may be advisable, even where not strictly required, to confirm with the company’s auditors that they are comfortable with the company’s proposed distribution.

The memorandum and articles of association of the company must always be examined for provisions which might affect whether the company can make a distribution, not least because of section 281 of the Act (referred to above). Similarly, contracts to which the company is a party may contain such provisions, especially loan agreements or contracts creating convertible instruments.

A company’s articles of association will usually state that distributions (not exceeding the amount recommended by the directors) are to be approved by the company in general meeting. Such a distribution, a "final" distribution, constitutes a debt owed by the company to the member. A company’s articles will also usually allow the directors to approve distributions by resolution of the board – this is called an "interim" distribution and can theoretically be revoked before payment as in this case no debt is created.

Where a non-cash distribution is proposed, express authority in the company’s memorandum or articles of association is required, failing which a special resolution of the company approving that distribution would be needed.

Where a distribution is made by a company in contravention of the Act and, at the time of the distribution, the member concerned knew or had reasonable grounds for believing that such distribution was being made in breach of the Act, that member is liable to repay that distribution (or its cash value, in the case of a non-cash distribution) to the company.

Additional rules apply to listed companies. A company listed on the Official List maintained by the UK Listing Authority must announce decisions by the board on dividends without delay and not later than 7.30 am on the next following business day (Listing Rule 9.35). A company with an AIM listing must announce without delay any decision to make a payment in respect of its AIM-listed securities, specifying the net amount payable per security, the payment date and the record date (AIM Rule 15). 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.