One of the things which many company directors find confusing is the difference between distributable reserves (those from which dividends can be paid) and those which are non-distributable.
Recently, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland have published new, detailed guidance on this topic. The 130-page document can be downloaded from http://www.icas.org.uk/site/cms/download/aa/TECH_01_09_Distributable_profits.pdf.
To pay a distribution other than from profits ‘available for the purpose’ (which broadly means net retained profits) is unlawful. Section 847 of the Companies Act 2006 provides that where an unlawful distribution is made to a member (shareholder) and ‘at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable to repay it (or that part of it, as the case may be) to the company’.
One particular point is that where reserves arise because of revaluations of assets or where the balance sheet shows accumulated retained losses (regardless of whether the current year’s trading is profitable), a distribution to shareholders probably cannot lawfully be made.