Key Takeaways
- An illegal or unlawful dividend occurs when a company distributes profits in breach of the Companies Act 2006, typically if there are insufficient distributable profits at the date of declaration.
- Directors who authorise or pay unlawful dividends can be held personally liable to repay the company, especially if they fail to check that sufficient profits exist.
- Shareholders who receive illegal dividends may also be required to repay those funds if they knew or ought to have known the payment was unlawful.
- If you do nothing and your company has paid an unlawful dividend, you risk personal claims from liquidators, HMRC, or creditors, as well as potential disqualification proceedings.
- No verified source confirms a specific statutory limitation period for recovery claims in England & Wales; directors and shareholders should act promptly to reduce risk.
- Our solicitors at Go Legal can help you assess whether a dividend has been lawfully paid, advise on litigation risks, and work to reverse or mitigate the effects of unlawful payments.
- Directors cannot retrospectively ratify or validate an illegal dividend through shareholder resolution if original statutory requirements were not met.
If you’re concerned about dividend legality or personal exposure as a director, our London-based solicitors at Go Legal can advise you on your specific situation. Book a free consultation or call 0207 459 4037 for clear, commercially-focused guidance.
What Are Illegal Dividends and Can Directors Be Held Personally Liable?
An illegal or unlawful dividend in England & Wales arises when a company pays a distribution to shareholders that is not made out of “profits available for the purpose”, as required by the Companies Act 2006. This means the company must have sufficient distributable profits, not just enough cash, at the date the dividend is declared. Directors who authorise unlawful dividend payments can be held personally liable to repay the company, especially if they failed to verify the necessary financial position or ignored their duties.
What Is an Illegal or Unlawful Dividend in England & Wales?
An illegal dividend is a distribution paid without sufficient distributable profits or without following the statutory procedures under the Companies Act 2006. Even if a company has cash reserves, the key legal test is based on the company’s accounts at the declaration date, not projected profits or subsequent revenue.
If you need advice on reviewing past or proposed dividend payments, our solicitors at Go Legal can help you understand your risks and next steps.
What Are the Statutory Rules for Dividend Payments?
The Companies Act 2006 sets out strict provisions governing dividends. Most importantly, section 830 states that a company may only make a distribution out of “profits available for the purpose”—that is, accumulated, realised profits that exceed accumulated, realised losses. Directors must rely on up-to-date accounts, annual or interim, to confirm this position as at the date of declaring the dividend.
If a dividend is declared without sufficient profits in the supporting accounts, the payment is unlawful regardless of the financial intentions or available cash.
The Distributable Profits and Declaration Date Test
Distributable profits are those shown in the company’s accounts, factoring in all relevant gains and losses to the date the board declares the dividend. Directors must check this carefully before authorising any payment.
When Are Directors Personally Liable for Unlawful Dividends?
Directors become personally liable for unlawful dividends if they knew, or ought to have known, that the company did not have sufficient distributable profits or did not comply with required procedures at the time of authorisation. Simply following external accountant advice is not enough—directors remain duty-bound to check the underlying accounts themselves.
Personal liability arises most clearly if directors fail to make reasonable enquiries, ignore warning signs about the company’s financial position, or neglect to review formal accounts before approving distributions.
If you are concerned about your potential personal exposure or past decisions, our team can help you map a robust defence or corrective steps.
Can Shareholders Be Forced to Repay Unlawful Dividends?
Yes. Under section 847 of the Companies Act 2006, shareholders who receive an unlawful dividend must repay those funds if, at the time of payment, they knew or should reasonably have known of the illegality. This applies whether the shareholder is also a director or an ordinary investor.
If you are unsure whether a dividend you received was legal, specialist advice can clarify your position and help you avoid further claims.
What Happens If an Illegal Dividend Cannot Be Recovered from Shareholders?
If shareholders are unwilling or unable to repay an unlawful dividend, the liability can shift to the directors who authorised the payment. This risk increases if directors neglected to check relevant accounts or disregarded the warning signs of insufficient profits.
If you learn that your company has issued unlawful dividends, early corrective action can help minimise personal liability.
How to Reverse or Fix an Illegal Dividend: Practical Steps
Addressing an unlawful dividend promptly can mitigate legal and financial consequences. The following steps can help directors and company secretaries correct the problem:
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Diagnose the Date Profits Were Tested
- Identify exactly when the dividend was declared.
- Gather copies of the accounts as at this date.
- Check if distributable profits were genuinely present in those accounts.
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Options to Repay, Reclassify, or Reverse
- Request repayment from shareholders who received the unlawful dividend.
- If repayment is not feasible, consider reversing the dividend entry in the company’s accounts or reclassifying it as a director’s loan—provided proper paperwork evidences the change.
- Update company records and provide full disclosure in accounts, especially if the payment created a negative reserve.
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Review the Possibility of Shareholder Resolutions
- Even where profits later become available, a special shareholder resolution after the event does not cure an unlawful dividend if statutory conditions were not met at declaration.
- A release or waiver for shareholders must itself comply with distribution rules.
Where urgent corrective action is needed, our solicitors can advise on negotiation, disclosure and legal compliance to help you protect your business.
What Are the Litigation and Tax Risks for Directors and Shareholders?
Failure to recover or promptly resolve illegal dividends exposes directors (and sometimes shareholders) to:
- Claims by liquidators, insolvency practitioners, or creditors in the event of insolvency.
- Civil proceedings against directors for breach of duty or for restoring value to the company.
- HMRC scrutinising or reclassifying unlawful distributions, which can trigger further tax liabilities, interest, and penalties.
If you are facing a claim or investigation relating to illegal dividends, our solicitors can provide strategic representation and robust defence.
Litigation by Liquidators or Creditors
When a company becomes insolvent, liquidators and creditors may target directors who sanctioned unlawful dividends, seeking to recover funds for the benefit of creditors.
Tax Consequences of Illegal Dividends
Unlawful dividends can lead HMRC to treat payments differently for tax purposes. Incorrectly classified payments may result in additional tax liabilities, interest, or penalties, especially if not reversed or rectified promptly.
What Laws and Deadlines Affect Unlawful Dividend Claims?
Section 830 of the Companies Act 2006 prevents distributions except out of profits available for the purpose, and section 847 establishes shareholder repayment obligations. Reliable accounts and compliance with statutory procedures are essential to avoid scrutiny.
No verified statutory provision confirms a specific limitation period for unlawful dividend claims in England & Wales. Directors and shareholders should seek immediate legal advice rather than rely on assumed time limits.
How Do the Courts Approach Liability for Illegal Dividends?
Statutory compliance and the company’s accounts at the declaration date are decisive factors. From Potel v CIR (1970) 46TC658, it is clear that declaration and payment of a dividend are two distinct legal events, so directors must assess profits at the point of declaration.
No further case law authority is verified for this article. Strict adherence to statutory rules and accurate record keeping remain the best defence.
Can Unlawful Dividends Be Ratified or Validated After Payment?
There is no provision in the Companies Act 2006 to retrospectively validate or ratify a dividend that was unlawful at the date of declaration. Even detailed shareholder resolutions or releases after the event will not cure the original breach if profits did not exist as required.
If you require help with corrective steps or compliance, our solicitors can assist in structuring a robust and legal solution.
Our Expert Approach to Illegal Dividend Disputes
Our solicitors at Go Legal deliver:
- Clear guidance on director and shareholder duties for lawful distributions.
- Support in responding to legal, tax, or accounting claims if illegal dividends are alleged.
- Practical advice for reversing, repaying, or defending against clawback actions.
- Early risk assessment and strategy to minimise personal liability and protect company value.
- Coordinated efforts with accountants to ensure compliance in both accounts and governance.
- Experienced litigation support for fast, confident resolution.
For advice on wider company law or insolvency issues, you may also find our article on Professional negligence claims for undervalue settlement useful.
Frequently Asked Questions
What is the difference between an illegal dividend and a director’s loan?
An illegal dividend is an unlawful payment to shareholders not backed by distributable profits at the declaration date. Such payments can sometimes be reclassified as a director’s loan—an amount repayable to the company—if the transaction was genuinely mistaken and appropriate records are updated.
Can dividends be paid if there is enough cash but no retained profit?
No. The company must have distributable profits as at the declaration date, regardless of available cash, as required by section 830 of the Companies Act 2006.
Am I personally liable for an unlawful dividend if I relied on accountant advice?
Potentially yes. Directors may still be liable even if they took professional advice, unless they took reasonable steps to check the company’s financial position and understood the accounts before authorising a distribution.
Can liquidators recover illegal dividends from former directors after insolvency?
Yes, this is possible where unlawful dividends were authorised by those directors and cannot otherwise be recovered from shareholders.
How far back can claims for unlawful dividends go?
No verified limitation period is confirmed in current statutory or case law. Immediate legal review is advisable as exposure may persist.
What happens if unlawful dividends are discovered during an audit?
The company may need to recover the distribution, correct its accounts, and disclose the issue. Swift action and clear records can reduce penalties or claims from authorities.
Are illegal dividend repayments tax-deductible for the company or shareholder?
Tax treatment varies depending on the circumstances and HMRC’s assessment. Specific tax advice should always be obtained.
Do public limited companies have extra requirements?
Yes. Public companies generally have to prepare interim accounts and meet additional formalities, but all companies are bound by the same principle—the distributions must only be made from profits available for the purpose.
Can illegal dividends affect director disqualification or board removal?
Yes, especially if the breach involved negligence or a failure of duty. Findings of misconduct may trigger disqualification or removal proceedings.
What evidence helps defend directors against illegal dividend claims?
Directors should keep board minutes showing review of financial accounts, up-to-date management reports, independent advice sought, and any documentation evidencing profits on the declaration date.
Get Expert Legal Support on Illegal Dividends and Director Liability
Understanding the legal rules for dividends is vital for directors and shareholders in England & Wales. Only genuine distributable profits, backed by current accounts, allow a lawful dividend. Directors and, sometimes, shareholders can face personal repayment claims if payments are made in breach of these rules. Liquidators, creditors, and HMRC may bring or escalate claims, particularly if the company becomes insolvent or regulatory breaches are uncovered.
If you have discovered or suspect an unlawful dividend, or face litigation or investigation over dividend payments, prompt action and specialist advice are essential. Our solicitors are experienced in rectifying, defending, and efficiently resolving illegal dividend issues, protecting your interests and your business reputation.
Book a free consultation with our team to discuss your position and next steps.
