Key Takeaways
- Paying an illegal dividend in the UK is a breach of company law, and directors can be held personally liable for any loss suffered by the company.
- An unlawful distribution usually occurs when a dividend is paid without sufficient distributable profits, which is strictly required under the Companies Act 2006.
- Directors who authorise dividends without checking up-to-date and accurate accounts risk personal claims for repayment and possible disqualification.
- The law requires directors to assess whether profits are genuinely available before any distribution to shareholders.
- Ignoring an illegal dividend may lead to compulsory repayments, regulatory penalties, director disqualification, and claims from liquidators or creditors.
- Both current and former directors can be held liable for approving unlawful dividends within the statutory limitation period, often six years.
- Shareholders must repay an illegal dividend if they knew, or ought to have known, the payment was not permitted under company law.
- Directors and companies can mitigate exposure by prompt disclosure and negotiating clawback or voluntary repayment, potentially limiting long-term liability.
- Our expert lawyers regularly advise on reviewing past distributions, negotiating with shareholders, and developing robust compliance protocols to prevent future unlawful dividends.
- We are rated Excellent on Trustpilot with over 130 five-star reviews and a 4.9/5 rating from satisfied clients.
For tailored advice or urgent case assessment, contact our specialist lawyers for a Free Consultation at 0207 459 4037.
What Are the Risks for Directors When Dividends Are Paid Illegally in the UK?
Paying a dividend without sufficient, realised profits violates company law in England and Wales and exposes directors to personal liability, even if the breach was unintentional. Failing to check the company’s most up-to-date financial position or relying on outdated accounts can immediately put both directors and shareholders at risk. Even if past practice or honest mistakes led to the payment, liability can still arise under the Companies Act 2006.
Directors must be aware that both their authorisation process and the source of funds are closely scrutinised. A payment wrongly described as a dividend could trigger claims for repayment, disqualification, and reputational damage. Our litigation team provides urgent advice to help directors resolve these issues discreetly and efficiently.
If you are unsure about the legality of a past or proposed dividend, or need urgent help rectifying an unlawful distribution, contact our experts for a confidential consultation. Acting early limits exposure and preserves opportunities for resolution.
What Counts as an Illegal Dividend Under UK Law?
A dividend is unlawful if paid out of capital, loans, or anticipated future profits rather than from accumulated, realised profits. The key provisions under the Companies Act 2006 (sections 830 and 831) require every dividend to be paid only from profits actually earned by the company, as shown in the most recent and reliable accounts.
If directors declare a dividend without the accounts demonstrating sufficient distributable profits, or if they neglect correct procedures—such as passing a valid board resolution or checking for accrued losses—the dividend becomes illegal.
Isla Ltd, a construction business in London, paid £40,000 in dividends based on predicted income from a recent contract. Their financial controller later discovered a calculation error; there was in fact no surplus after accounting for prior losses. This rendered the dividend payment illegal and left the directors facing personal liability for the sum distributed.
Dividends declared in breach of these requirements can later be clawed back, sometimes years after payment, particularly during insolvency. Directors and shareholders should always confirm compliance with the Companies Act before making or receiving any distribution.
How Do Directors Authorise Dividends Legally in England & Wales?
Legally authorising a dividend requires strict adherence to company law and documented internal processes. All directors should:
- Check Accurate Management Accounts: Ensure current accounts show genuinely realised profits available for distribution—not just projected earnings.
- Conduct a Formal Board Meeting: Directors must review the accounts, discuss their sufficiency, and record the decision through board minutes.
- Obtain Shareholder Approval for Final Dividends: For final dividends, secure approval at a general meeting as per the company’s Articles of Association.
- Document Every Step: Keep copies of management accounts, board resolutions, profit and loss statements, and shareholder approvals as a compliance trail.
- Comply with the Company’s Articles: Verify any special rules or restrictions in the Articles regarding dividend approval.
Directors should always ensure their board minutes specifically discuss distributable profits and include a signed statement of reliance on up-to-date management accounts. Avoid shortcuts based on prior years’ figures, especially if profits have fluctuated.
Maintaining this exacting standard of due diligence and record-keeping is the best way to defend against future repayment claims or regulatory queries. If in doubt, our experts can review your dividend process for compliance.
What Are the Legal Duties of Directors When Paying Dividends?
Directors must act within the core duties codified by the Companies Act 2006:
- Section 172: Promote the success of the company for the benefit of its members as a whole, taking into account creditors if insolvency is foreseeable.
- Section 174: Exercise reasonable care, skill, and diligence, matching both general standards and any specific expertise held by the director.
When considering dividends, the law expects directors to:
- Rigorously review up-to-date financial information.
- Check for any accumulated losses that could eliminate distributable profits.
- Avoid authorising dividends that threaten the company’s ongoing financial health or creditor security.
Teresa, a director of a retail chain in Bristol, proposed a £60,000 dividend in December 2023. Before making any payment, she requested a fresh management report, confirming actual profits after unforeseen bad debts. Her diligence protected both her company and herself from future claims.
Meticulous decision-making and proper documentation not only preserve compliance but also protect directors from personal liability. To explore wider director responsibilities and pitfalls, see our article on Directors’ Duties in the UK: Fiduciary Obligations and Breach under the Companies Act 2006.
What Are the Risks and Consequences for Directors Who Approve Unlawful Dividends?
Authorising an illegal dividend places directors at immediate and direct risk:
- Personal Repayment Order: Under section 847 of the Companies Act 2006, directors who facilitated the payment can be ordered to repay the unlawful sum, especially where the company is insolvent or suffers loss as a result.
- Director Disqualification: Repeat or egregious breaches can lead to director disqualification under the Company Directors Disqualification Act 1986, risking a ban from directorship for up to 15 years.
- Claims from Liquidators or Creditors: In insolvency, officeholders actively pursue recovery of unlawful payments, including from former directors and shareholders.
- Reputational Impact: Director faults over unlawful distributions can trigger regulatory scrutiny, affecting careers and business relationships.
Martin, a director at a Manchester tech firm, authorised an £80,000 dividend using prior-year accounts. When the company later entered liquidation, the liquidator identified the distribution as unlawful. Martin was pursued personally for repayment of the dividend to benefit creditors.
Prompt legal advice safeguards directors by clarifying their exposure and providing a defence should investigations begin. Our litigation specialists are on hand for urgent support if you are at risk.
Can Directors and Shareholders Be Forced to Repay Illegal Dividends?
Directors, and in some cases shareholders, may be forced to repay illegal dividends under UK law. Section 847 of the Companies Act 2006 gives the company, or its liquidator in insolvency, a clear legal route to recover these funds.
- Directors’ Liability: Those who authorised an unlawful distribution almost always face repayment demands, particularly in insolvency or creditor actions.
- Shareholder Clawback: Shareholders who knew, or reasonably should have known, that the dividend was unlawful are equally liable for repayment, especially if they are financially sophisticated or closely involved in management.
- Enforcement Process: Recovery can be achieved by formal demand, negotiation, or proceedings before the courts. In insolvency, liquidators have a duty to pursue such claims for the benefit of creditors.
Leaving the company does not automatically end a director’s liability. Former directors can be pursued for up to six years after authorising an illegal dividend, and even beyond this if fraud is proved.
If your company is at risk of insolvency, early engagement can limit your exposure. For directors facing liquidation, our detailed guide on Director Liquidation in the UK: Legal Duties, Risks & Disqualification may provide further clarity.
How to Rectify an Illegal Dividend: Step-by-Step for Directors and Companies
When an illegal dividend is discovered, immediate action minimises further legal or financial consequences. Directors should:
- Quantify the Full Amount: Determine exactly which distributions were unlawful and the value at stake.
- Collect Supporting Documents: Gather management accounts, all board and general meeting minutes, dividend vouchers, and shareholder notifications.
- Seek Specialist Legal Advice: Urgently consult our expert lawyers to discuss the correct mitigation steps and protect director interests.
- Notify Stakeholders: Disclose the error transparently to shareholders, co-directors, and—if still within the reporting period—your auditor.
- Negotiate Voluntary Repayment: When possible, arrange swift repayment by recipients; voluntary clawback is often the speediest resolution.
- Update the Records: Amend accounts and review internal procedures to ensure ongoing compliance and avoid repeat breaches.
- Communicate with Auditors or Liquidators: Early disclosure supports mitigation and can be leveraged to negotiate more favourable resolution terms if the company is or becomes insolvent.
Sophie, finance director at an East London manufacturer, identified a £15,000 dividend paid in error. She immediately raised the issue with the board, helped negotiate voluntary repayment from affected shareholders, and updated auditors. This decisive response avoided regulatory fines and protected the company’s standing.
Need to remedy a historic or recent illegal dividend? Download our step-by-step legal checklist or request confidential advice from one of our specialist lawyers today.
What Laws and Deadlines Apply to Illegal Dividends in the UK?
Companies Act 2006: Distribution Tests and Director Liability
- Section 830: Prohibits companies from making distributions except out of profits available at the time.
- Section 831: Imposes extra restrictions for public companies.
- Section 847: Gives the company and its liquidator clear grounds to claim repayment of unlawful distributions from both directors and shareholders who should have known about the breach.
Directors should always use the most recent accounts and management information to check for available profits. Relying on forecasts or borrowing for dividends is strictly prohibited by the Act.
Limitation Periods for Repayment Claims
- The base limitation period for most recovery actions is six years from the date of payment (under the Limitation Act 1980).
- This can be extended in cases of deliberate breach or fraud.
- Late claims are normally struck out unless exceptional factors are present.
Acting fast is crucial; waiting too long often removes the chance for voluntary settlement and can result in costly court proceedings or increased personal liability.
Directors should review all past distributions well within the limitation window and take early action on any suspected irregularity for best protection.
What Do the Courts Say About Illegal Dividends and Director Liability?
Courts confirm direct and personal liability for directors who authorise unlawful dividends, even if the breach was inadvertent or shareholders were unaware. Notable case law shapes the landscape for director accountability.
| Case | Facts | Outcome | Why It Matters |
|---|---|---|---|
| Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712 | Directors approved dividends where profits did not exist | Held personally liable for repayment | Confirms the strict liability of directors, even where dividends were paid in good faith or before company insolvency. |
“The liability to repay a dividend unlawfully paid is a liability which arises whether or not the directors or shareholders were at fault.”
— per Lord Justice Chadwick, Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712
Directors cannot avoid responsibility by blaming advisers or processes. Detailed due diligence and documented consultation will give the strongest defence in any future dispute.
What Are the Defences and Mitigating Factors for Directors Accused of Unlawful Distribution?
Directors are not automatically liable if they can prove diligent, honest efforts or reliance on qualified advice:
- Good Faith and Genuine Error: If directors believed on reasonable and properly informed grounds the distribution was lawful, courts may weigh this in their favour.
- Professional Reliance: Following detailed accountant or auditor guidance—kept in writing and genuinely relied upon—can mitigate or completely eliminate liability.
- Robust Records: Well-kept board minutes, calculations, and evidence of internal controls offer crucial evidence for defending a claim.
Maintain a comprehensive, signed record of all professional advice before declaring a dividend. This is your first line of defence if your decision is later challenged.
If an allegation has arisen, our lawyers can review your paperwork and advise on the best evidence and strategies for negotiation or defence.
Clawback, Negotiated Repayment, and Voluntary Disclosure: Practical Steps to Minimise Liability
Swift, transparent action remains the best strategy after discovering an illegal dividend:
- Voluntary Clawback: Immediate repayment from directors or shareholders, agreed amicably, provides strong evidence of remediation and can prevent regulatory escalation.
- Open Disclosure: Proactively informing auditors, regulators, or the liquidator may improve the prospects of a private, negotiated settlement and avoid penalties.
- Negotiated Settlements: Early agreement typically reduces the overall sum repayable, legal costs, and prevents court proceedings.
- Document Remediation: Save all correspondence, repayment records, and minutes as contemporaneous proof of your approach and commitment to compliance.
A Kent-based startup discovered a £25,000 illegal dividend paid in 2021. The board requested repayment from shareholders and documented the voluntary settlement with their auditor. This avoided litigation, reduced costs, and decreased adverse publicity.
Taking early advice and recording each stage of your response both strengthens your defence and demonstrates integrity to all stakeholders.
How Can Companies Prevent Illegal Dividends in the Future?
Effective prevention relies on putting clear checks and controls in place:
- Regular Management Account Reviews: Monitor profit and loss at least quarterly—don’t rely solely on annual accounts.
- Real-Time Profit Tracking: Utilise cloud accounting for near real-time alerts on profits eligible for distribution.
- Director and Staff Training: Educate all relevant team members on the statutory requirements under the Companies Act 2006.
- External Audits: Schedule independent reviews prior to significant distributions to double-check compliance.
- Clear Policies and Procedures: Establish internal controls and mandate that every proposed dividend be checked and signed off by finance and legal.
Lily, a financial controller in Birmingham, introduced monthly profit reconciliations along with mandatory board sign-off for all proposed dividends. This allowed the team to spot a £10,000 profit misstatement and prevent an illegal dividend.
By creating a culture of compliance, companies not only avoid legal disputes but also strengthen their reputation with shareholders and regulators.
Our Winning Approach to Illegal Dividend Disputes and Director Liability
Our team provides industry-leading advice and representation for directors and companies facing issues with illegal dividends in the UK. We deliver:
- Fixed-Fee Compliance Audits: Transparent pricing for urgent, strategic reviews of past or proposed distributions.
- Experienced Litigation Support: A proven track record in defending directors’ interests in court and negotiating settlements out of court.
- Confidential, Client-Focused Advice: Secure platforms for document transfer, robust data privacy, and real-time client access throughout your case.
- Practical Protocols: Guidance on policies and internal controls to prevent future unlawful distributions.
- Highly Rated Client Service: Over 130 five-star reviews and a 4.9/5 rating on Trustpilot confirm our commitment to results and client satisfaction.
For proactive advice or a prompt assessment of your risk, contact our specialist litigation team or safely upload your case documents via our Go Transfer portal.
Frequently Asked Questions
What exactly counts as an illegal dividend in the UK?
An illegal dividend is any payment to shareholders made from company funds other than realised profits, in breach of the Companies Act 2006. Common causes include relying on outdated accounts, ignoring accumulated losses, or failing to follow the required authorisation process.
Who can be made to repay an illegal dividend?
Both directors who authorised the unlawful payment and any shareholders who knew or should reasonably have known that the dividend was not lawfully available can be required to repay the sum—often extending to former directors and shareholders, especially in insolvency.
What’s the time limit for claims to recover an unlawful dividend?
Most claims must be made within six years of the unlawful payment. However, if fraud or concealment is involved, courts may allow claims after this period.
Can a director avoid liability if they relied on accountant advice?
Yes, if directors have clear written evidence that they reviewed relevant accounts, obtained professional advice, and acted in good faith, liability can be reduced or even dismissed by the courts.
What steps should a company take if it has paid an illegal dividend?
Immediately:
- Identify and quantify the unlawful payment.
- Gather all supporting paperwork.
- Speak with our expert lawyers and notify your auditors.
- Initiate voluntary repayments from recipients where possible.
- Update records and amend procedures to prevent a repeat.
Prompt action demonstrates good faith and usually helps resolve matters swiftly.
Are dividend repayments always enforced if a company goes insolvent?
Not in every case, but liquidators are obliged to investigate and recover unlawful dividends for the benefit of creditors. Voluntary cooperation and prompt repayment often result in more lenient outcomes.
How can directors avoid making future illegal dividends?
By holding regular board meetings, using real-time accounts, maintaining detailed records, ensuring external audits, and adopting clear policies on dividend approval. Good practice and training are critical to mitigating these risks.
Get Specialist Advice on Illegal Dividend Issues Today
Directors and shareholders face serious legal and financial consequences when dividends are paid in breach of the Companies Act 2006. Strict procedures, up-to-date accounts, and proper board documentation are essential for ongoing compliance. If there is concern about a past or planned dividend, quick action and expert guidance are vital. Courts hold directors personally liable for breaches—sometimes years after a payment was made—and limitation periods can be extended in serious cases.
If you need strategic advice or are facing a repayment demand over a dividend in England or Wales, our experienced solicitors can help resolve your matter rapidly and effectively. Call us on 0207 459 4037 or use our online contact form to book a Free Consultation.
