In light of the global economic crisis caused by COVID-19, many firms are being forced to cancel and rescind dividend payments in order to try to maintain cash reserves during this unprecedented time.
Every part of the economy, both nationally and globally, is now feeling the impact of the pandemic, and the total amount of dividends cancelled in UK companies across the public and private sector this year has already reached £1.5 billion.
What is a dividend?
A dividend is a distribution of a company’s post-tax profits to its shareholders. As with all distributions, in order for a company to be able to lawfully pay a dividend, it must have sufficient distributable profits that are justified by reference to relevant financial accounts.
Any dividend paid out by a company will, depending on its constitutional documents, be either a final dividend or an interim dividend.
If interim dividends are permitted under a company’s constitutional documents, they can be paid at any time throughout the year and are calculated before the company’s annual earnings have been determined.
Typically, interim dividends are decided solely by the board and are distributed either quarterly or after the first six months of the company’s financial year.
Unless declared by shareholders, an interim dividend becomes a debt payable to shareholders when it is paid, rather than when the board resolves to pay it. There is no legal liability to pay interim dividends, even when they have been properly approved by the directors, as the board can always rescind its resolution to pay an interim dividend at any point up to the time of actual payment.
Cancelling an interim dividend
If a company’s board has declared, but not yet paid, interim dividends and no other steps have been taken to establish a legally binding liability to make the payment, including shareholder approval, the board may rescind its resolution to pay an interim dividend, and the shareholders will have no further rights to this payment. A board resolution can be rescinded by the passing of a new resolution at a subsequent board meeting.
Companies House - 3-month extension period to file accounts
From 25 March 2020, businesses will be able to apply to Companies House for a 3-month extension for filing their accounts. This joint initiative between the government and Companies House will mean businesses can prioritise managing the impact of coronavirus rather than focusing on reporting requirements. It will also provide companies with flexibility and breathing space to assess the financial impact of COVID-19 on both their business and their shareholders.