I have recently reviewed a case where a liquidator queried dividends of £345,000 taken in the period leading up to liquidation. The focus was not just on the total amount. It was on whether the company could actually pay those dividends at the time they were taken.
This is where many directors get caught out.
Taking dividends during the life of a business is perfectly normal and, in many cases, the most tax efficient way of extracting income. But that only works where the company has sufficient distributable profits and is financially stable at the time.
Once a company starts to struggle, the position changes.
Dividends can only be paid out of profits. Not turnover. Not cash in the bank. Profits. And even where profits exist on paper, if the company is unable to pay its debts as they fall due, or its liabilities exceed its assets, then the justification for paying dividends becomes much more difficult.
In this particular case, the dividends had been taken over a period of 4 years:
Year 1: £60,000
Year 2: £85,000
Year 3: £95,000
Year 4: £105,000
At the time each payment was made, it may not have felt excessive. But when the position was reviewed later, in the context of liquidation, the total of £345,000 told a very different story.
This is exactly how these issues tend to arise. It is rarely one large payment that creates the problem. It is a series of decisions made over time, often while the company is under increasing financial pressure.
What liquidators will do in these situations is go back and look at each dividend individually. Not just the amount, but the timing. They will ask what the financial position of the company was at that exact point, whether there were sufficient retained profits, whether the company was already struggling to meet its liabilities, and whether HMRC or other creditors were building up at the same time.
They will also look closely at the records.
In this case, the liquidator requested the dates the dividends were declared, copies of board minutes and dividend vouchers, management accounts and supporting financial information, and an explanation of how the figures had been calculated.
This is where things often become more difficult. In many owner managed businesses, the paperwork is not always kept up to date. Dividends are taken regularly, sometimes based on what feels affordable rather than what is properly supported by accounts at that time.
When those records are missing or incomplete, the liquidator may take the view that the dividends were not properly declared at all.
And once that happens, the position can shift quite quickly.
The dividends may be reclassified as an overdrawn director’s loan account, treated as unlawful distributions, or form part of a wider claim depending on the overall conduct.
In practical terms, that can mean a request for repayment. In larger cases, where the figures run into hundreds of thousands of pounds, that can become a very serious issue for the director personally.
There is also an important behavioural point here. Many directors take dividends while also dealing with increasing pressure from HMRC or other creditors. VAT may be overdue, PAYE may be building up, and suppliers may be stretching terms. At the same time, funds are still being extracted from the business.
When viewed in isolation, each decision may feel justified. When viewed together after the event, the overall picture can look very different. And that is exactly how these claims arise.
The key issue is not just whether dividends were taken. It is whether they were taken at a time when the company could genuinely afford them.
These cases are rarely black and white. The detail of the financial position at the time, the quality of the records, and the explanation provided by the director will all be taken into account.
With the right approach, it is often possible to go back through the figures, understand what actually happened and bring clarity to the position. But once the company has entered liquidation, the scope to manage that position becomes much narrower.
Which is why these issues are always better looked at early, rather than explained later.
Disclaimer
This article is provided for general information purposes only and does not constitute legal or financial advice. Each situation will depend on its own facts and specific circumstances, and you should not rely on the above without taking appropriate professional advice.
If you would like to discuss your situation in confidence, please contact:
Navigate Business Recovery Limited
Office: 0330 236 9937
Mobile: 07961 116321
Email: vee@navigatebr.com
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