Re: Dividends exceed profits


"Mike Lewis" <mike-at-home@xxxxxxxxxxxxxxxxxxxxx> wrote in message news:yE25i.307$RP4.300@xxxxxxxxxxxxxxxxxxxxxxx

"Peter Saxton" <peter@xxxxxxxxxxxxxxxxx> wrote in message
news:i379531e7c1ojgldqeqeg96a10ts3mub2u@xxxxxxxxxx
On Wed, 23 May 2007 18:24:19 GMT, "Martin"
<ngng@xxxxxxxxxxxxxxxxxxxxxxxxxx> wrote:

>Can anyone advise, please? This is a new one on me....
>
>A (close) Ltd Coy authorises and pays a number of interim dividends, all
>adequately covered by profits. It then makes a big (and unexpected) >loss
in
>the final qtr. Thus, at year-end, the divs already paid are no longer
>covered by accrued profits.
>
>Does this render the dividends illegal, or is it sufficient that the
profits
>were there at the time of the distribution?
>
>If illegal, what are the consequences and how should the matter be
handled
>in terms of annual accounts, Coy House, HMRC?
>
>The company is expected to return to profit, but not for a year or more.
>And it has sufficient borrowing capacity to meet its cash needs until
then.
>
>Thanks for any advice / thoughts....

At the point the dividend is declared the directors must reasonably
believe that there are distributable profits. If that is the case they
are not illegal and subsequent losses don't change that.

Agreed but you can't just ignore inconvenient costs on the date at which you
declared the dividend or include unearned income.. That is when you measure
the distributable profits you have to exclude income you have in voiced in
advance of doing the work and you must include a provision for costs
incurred even if you haven't received the invoice,. Also you must make a
reasonable provision for the corporation tax due on the profits to date.
Also you have to deduct depreciation to date.


Many thanks Peter & Mike. Very helpful - and yes, all the correct calcs & considerations were made before the interim divs were paid.

--
Martin

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