Distributions

Entitlement to Dividend

There is no automatic entitlement to a dividend. It is usually a matter for the directors to decide whether to propose a dividend and if so how much should be paid.The default position provides that the right to a dividend arises only when declared by the directors and confirmed by the members at the annual general meeting. The directors may declare an interim dividend, between annual general meetings.

Particular classes of shareholders may be entitled to a dividend under the terms of the rights attaching to their shares. They may have a preference relative to other classes of shareholder. Almost invariably, the right arises only if declared. Exceptionally, the constitution or a shareholders agreement may provide for an entitlement to a dividend.In all events, a dividend may be paid only where there are distributable profits.

From an economic perspective, the payment or non-payment of a dividend should be neutral. The company by reinvesting the dividend should in principle increase future earnings and the ultimate value of the company. There should be a trade-off between dividends and capital gains. This is a theoretical position although the actual outturn might differ significantly.

Before or instead of recommending any dividend, the directors may set aside from profits of the company, such sums as they think proper as a reserve.  The reserve shall, at the discretion of the directors, be applicable for any purpose to which the profits of the company may be properly applied. Pending such application, they may either be used in the business of the company or be invested in such investments as the directors may lawfully determine. The directors may without placing the profits of the company into a reserve, carry forward any profits which they think prudent not to distribute.

Declaration of Dividends I

The directors, as managers of the company, usually control whether and to what extent dividends are made. A final dividend is usually declared by the directors and confirmed by the annual general meeting.  The AGM may not approve a dividend in excess of the amount recommended by the directors.

The default constitution and standard articles allow directors to declare an interim dividend. The directors may pay an interim dividend if it appears justified by the profits of the company. It is a matter for their discretion whether or not they do so.

Declaration of Dividends II

A dividend becomes payable once declared.  Once declared, it becomes a debt due. It cannot be retrieved at this point, as it belongs to the shareholder.

Companies may pay dividends other than in cash.  Formerly, public companies could pay dividends by a warrant, which was a form of printed negotiable instrument, drawn on the company’s bank.  Where a tax repayment was available, the warrant attached a foil which could be used to support a claim for refund.

Under tax law, most distributions from companies, save where there is a substantial reduction in shareholding, are deemed to be income.  They will be accordingly subject to income tax and other charges, rather than (the typically lower rate) capital gains tax.  See generally the sections on capital taxation and distributions.

Distributable Profits

Dividends may be paid only out of realised profits. They may be paid, only to the extent that there are distributable profits.    The availability of profits is determined by reference to the latest annual accounts.  The 2014 Act confirms that a distribution may not be made, unless and then only to the extent to which there are profits available for this purpose.

There is a choice in the methods by which financial accounts may be prepared.  Under IFRS, a provision, including that in respect of the fall in the value of a fixed asset (e.g. real property) is treated as a realised loss, thereby diminishing the level of available profits.  Where the financial statements are prepared under the Companies Act, a provision arising from the fall in the value of a fixed asset is not treated as a loss.

Even where dividends are prohibited by reference to the latest annual accounts, it may be possible to make them by reference to interim accounts, showing a distributable profit.  Persons who know or have reasonable grounds for believing that a distribution is unlawful must repay it to the company.

At the end of each financial year, the profit and loss account is (effectively) added (or subtracted in the case of a loss) to the running profit and loss accounts. It forms a fund which can be distributed or retained, effectively as capital.  The accumulated balance on the profit and loss account is generally available for distribution.  If there is a negative balance, distributions are not permissible until there have been sufficient profits to achieve a positive balance.

Capital Profits

Most non-revenue additions to the capital account are not distributable. Gains arising from the revaluation of assets are not “realised” and are not distributable. Sums retained as revenue reserves in previous years are generally distributable.  There are a number of instances where sums must be added to the capital account, (for example, in the event of redemption of shares and in the case of share premiums) which are not distributable.

Distributions may be made out of capital profits.  Under general accounting practice, the sale of a capital asset may create or contribute to an overall profit which may be distributed. Equally, it may create a loss which reduces distributable profits.

Provision for depreciation is required to be made for depreciating assets in the profit and loss accounts, thereby reducing the distributable profits. The cost of the asset should be charged to the profit and loss account over its useful life.  When it is sold, the accumulated depreciation is taken into account in measuring the profit or loss.

The 2014 Act applies the statutory approval procedure to the distribution of pre-acquisition profits, where a subsidiary is acquired with undistributed profits.  A declaration is required by the directors that the distribution having been made, the company would be able to pay its charges, debts and other liabilities in the financial statements, as they fall due.  The declaration must be supported by an auditor’s report stating that in its opinion, the declaration is not unreasonable.

Further Tests for Distributions

Public limited companies are subject to additional limitations on their ability to pay dividends.  They may not pay a dividend unless the level of their net assets exceeds their called-up share capital and undistributable reserves.  A dividend may be declared, only to the extent that it does not reduce this amount below zero.

An investment company is subject to different rules on making distributions.  An investment company is effectively a conduit/ intermediary for investment by others. It must be specifically registered as such and must meet certain criteria.The are highly regulated. In the case of retail funds, the regulation is highly prescriptive.

The capital of an investment company is entirely variable Its assets expand and shrink as investments for shares are made and redeemed. It may distribute all of its assets in order to fund the redemption of shares.

Calculating Distributable Income I

The question whether a distribution may be made by a company and the amount of any distribution which may be so made is determined by reference to the relevant entries in the financial statements. The relevant financial statements for any company in the case of any particular distribution are—

• except in the cases below, the last statutory financial statements in respect of the company, prepared in accordance with the requirements of the Companies Act or IFRS which were laid in respect of the last preceding financial year for which statutory financial statements so prepared were laid;
• if that distribution would be found to contravene the Act if reference were made only to the last statutory financial statements, such interim financial statements in  respect of the company, as are necessary to enable a reasonable judgement to be made as to the amounts of any of the relevant items; or
• if the distribution is proposed to be declared during the company’s first financial year or before any statutory financial statements are laid in respect of that financial year, such initial financial statements, in relation to the company as are necessary to enable a reasonable judgement to be made as to the amounts of any of the relevant items.

Calculating DIstributable Income II

The financial statements for the above purposes must have been properly prepared (subject only to matters which are not material) for the purpose of determining by reference to the relevant items in those statements, whether that distribution would be in contravention of the Act. Unless the company is entitled to and has availed itself of the audit exemption, the statutory auditors of the company must have made a report in respect of those financial statements.

If the auditor’s report is not unqualified, the statutory auditors must also have stated in writing (either at the time the report was made or subsequently) whether, in their opinion, that qualification is material for the purpose of determining whether the distribution would be in contravention of the Act. A copy of any such statement must have been laid before the company in general meeting.

The statement suffices for the purposes of a particular distribution, not only if it relates to a proposed distribution, but also if it relates to distributions that have not yet been proposed at when it is made. Where one or more distributions have already been made by reference to those same financial statements, it applies as if the amount of the proposed distribution was increased by the total of the distributions already made.

Revaluation I

If on a revaluation of a fixed asset, an unrealised profit is shown to have been made and on or after the revaluation, and a sum is written off or retained for depreciation of that asset over a period, then an amount equal to the amount by which that sum exceeds the sum which would have been so written off or retained for depreciation of that asset over that period if that profit had not been made, shall be treated as a realised profit made over that period.

Where the company prepares IFRS entity financial statements, a provision is treated as a realised loss.This is also the position in respect of Companies Act entity financial statements, subject to the below exception. Accordingly, a provision reduces distributable profits.

Where it prepares Companies Act entity financial statements, a provision for the diminution in value of a fixed asset appearing on the revaluation of all the fixed assets (exclusive of goodwill may be treated as not realised, subject to conditions.  A re-consideration of the value by the directors is treated as a revaluation for this purpose. Where the assets have not actually been revalued, the exception applies only if the directors are satisfied that the aggregate value of the assets is not less than that shown in the financial statements.

Revaluation II

The provisions in the last paragraph regarding re-valuation of the company’s fixed assets affecting the amount of the relevant items as stated in the financial statements do not apply for the purpose of a distribution, unless it is stated in a note to those statements

• that the directors have considered the value at any time of any fixed assets of the company without actually re-valuing those assets;
• that they are satisfied that the aggregate value of those assets at the time in question is or was not less than the aggregate amount at which they are or were for the time being stated in the company’s statutory financial statements; and
• that the relevant items affected are accordingly stated in the relevant financial statements on the basis that a revaluation of the company’s fixed assets is deemed to have included a revaluation of the assets in question, took place at that time.

Development costs included as an asset in the accounts, are to be treated as a realised loss This does not apply to any part of the amount which represents an unrealised profit made on the re-valuation of the costs. This treatment of development costs does not apply where there are special circumstances which justify the directors in deciding that the amount mentioned in respect of the development costs in the accounts, shall not be treated as a realised loss. This treatment requires a statement in the notes to the accounts that the amounts are not to be treated as a realised loss and explains the circumstances relied upon to justify the decision of the directors.

Payment of Dividends

Dividends are declared and paid in accordance with the amount paid or deemed paid on the shares in respect of which the dividend is paid. They are paid subject to the rights of those who are entitled to any special dividend rights. They are paid proportionally to the amounts paid or credited as paid, on the shares during any portion or portions of the period in respect of which the dividend is paid.  If shares are issued on terms which provide that they shall rank for dividend as and from a particular date, then they shall rank for the dividend accordingly.

The directors may deduct from any dividend payable to a member, all sums of money due by him on account of calls or otherwise in relation to the shares of the company.

Any dividend, interest or other money payable in cash in respect of any shares may be paid—

• by cheque or negotiable instrument sent by post directed to or otherwise delivered to the registered address of the holder, or where there are joint holders, to the registered address of that one of the joint holders who is first named on the register or to such person and to such address as the holder or the joint holders may in writing direct; or
• by agreement with the payee (which may either be a general agreement or one confined to specific payments), by direct transfer to a bank account nominated by the payee.

Any such cheque or negotiable instrument shall be made payable to the order of the person to whom it is sent. Any one of two or more joint holders may give valid receipts for any dividends, bonuses or other money payable in respect of the shares held by them as joint holders, whether paid by cheque or negotiable instrument or direct transfer. No dividend shall bear interest against the company.

Distributions in Specie

The shareholders in general meeting may direct payment of a dividend or bonus wholly or partly by the distribution of specific assets. This may be by way of paid up shares, debentures or debenture stock of any other company or in any one or more of such ways. The directors of the company shall give effect to such resolution. Where any difficulty arises in regard to such distribution, the directors may settle the matter as they think expedient

In the above case, the directors may—

• issue fractional certificates and fix the value for distribution of such specific assets or any part of them;
• determine that cash payments shall be made to any members upon the basis of the value so fixed, in order to adjust the rights of all the parties; and
• vest any such specific assets in trustees as may seem expedient to the directors.

Companies may issue new shares by way of dividend.  This is referred to as a scrip dividend.  The shareholder may be permitted to take the new shares or alternatively sell them on to another.

Disguised Distributions

Any transfer of a company asset to a shareholder or to a connected person at undervalue or any other such transfer of value is an effective distribution of the company’s assets. Apart from the immediate taxation consequences, the transaction where permissible at all must be treated as a dividend for company law purposed. It must be covered by available distributable profits.

The principle is of wide potential application. There is an obvious temptation for the controllers of a company to transfer company’s assets to themselves or to connected persons at an undervalue. Any transaction involving a direct or indirect transfer of value to a shareholder or to persons connected to him may involve a distribution.

The principle has a common law basis and its extent is not precisely defined. It looks at the substance of the arrangement. The transfer of value to a person company connected with a shareholder may be subject to the principle.

The summary approval procedure mandates certain transactions that might otherwise fall foul of the principle. It provides for an examination and certification of the company’s solvency by the directors.

The amount of distribution is deemed to be zero (for company law purposes) where the consideration is not less than the book value of the asset. In other cases, it is deemed to be the amount by which the book value of the assets exceeds the amount or value of the consideration for the disposal. The company’s profits available for distribution are treated as increased by the amount by which the amount or value of the consideration for the disposition, exceeds the book value of the asset.

Bonus Issue

An issue of bonus shares may be made from certain funds and reserves subject to compliance with conditions. The following provisions apply, save where the company’s constitution provides otherwise.

The company in general meeting may, on the recommendation of the directors, resolve that it is desirable to capitalise any part of the below sum which is not available for distribution, by applying such sum in paying up in full unissued shares to be allotted as fully paid bonus shares, to those members of the company who would have been entitled to that sum if it were distributed by way of dividend (and in the same proportions).

The sums in respect of which a bonus share may be issued above are

• any sum for the time being standing to the credit of the company’s undominated capital;
• any of the company’s profits available for distribution;
• any sum representing unrealised revaluation reserves.

Where the directors of a company have resolved to approve a bona fide revaluation of all the fixed assets of the company, the net capital surplus in excess of the previous book value of the assets arising from such revaluation may be—

• credited by the directors to undominated capital, other than the share premium account; or
• used in paying up unissued shares of the company to be issued to members as fully paid bonus shares.

References and Sources

Primary References

Companies Act 2014S.117 to S.126  (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.10   Courtney

Keane on Company Law 5th Ed. (2016) Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10^th Ed. (2016) P. and S. Worthington

Company Law in Context 2^nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law