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(a) Dividends are the return received by shareholders in respect of their investment in a company. Subject to any restriction in the articles of association, every company has the implied power to apply its profits in the distribution of dividend payments to its shareholders. The long-standing common law rule is that dividends must not be paid out of capital (Flitcroft’s case 1882). The current rules relating to the payment of dividends are to be found in part 23 Companies Act (CA) 2006. The Act governs, and imposes restrictions on distributions made by all companies, both public and private. Section 829 defines distribution as any payment, cash or otherwise, of a company’s assets to its members, except for the categories stated in the section, which include the issue of bonus shares, the redemption of shares, authorised reductions of share capital, and the distribution of assets on winding up. Section 830 goes on to provide the basic condition for distribution, applying to all companies, which, in essence, is that they must have ‘profits available for that purpose’. This term is defined in the section as accumulated realised profits less accumulated realised losses, with profit or loss being either revenue or capital in origin. It is important to note that the use of the term accumulated means that any previous years’ losses must be included in determining the distributable surplus, and that the requirement that profits be realised prevents payment from purely paper profit resulting from the mere revaluation of assets. Section 841 provides that all losses are to be treated as realised except where a general revaluation of all fixed assets has taken place.
The foregoing realised profits test applies to both private and public companies, but public companies face an additional test in relation to distributions, in that s.831 requires that any distribution must not reduce the value of the company’s net assets below the aggregate of its total called up share capital plus any undistributable reserves. The effect of this rule is that public companies have to account for changes in the value of their fixed assets, and are required to apply an essentially balancesheet approach to the determination of profits.