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Buachaill
Buachaill, Barrister
Category: Law
Satisfied Customers: 10591
Experience:  Barrister 17 years experience
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I have been trying to find information in relation to unpaid

Customer Question

Hello,
I have been trying to find information in relation to unpaid share capital and declaring a dividend and receiving a dividend payment. Situation is that the sole Director has 100 unpaid shares and they have not been called up. But are there any consequences regarding the shareholder declaring and paying himself a dividend but the share capital remains unpaid? As per the Articles of Association:
Calculation of dividends:
42.1: Except as otherwise provided by the articles or the rights attached to shares, all dividends must be:
42.1.1: Declared and paid according to the amounts paid up on the shares on which the dividend is paid, and
42.1.2: Apportioned and paid proportionately to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid.
42.2: If any share issues on terms providing that it ranks for dividend as from a particular date, that share ranks for dividend accordingly.
So does that mean then the dividend is not ultra vires then in that case as per 42.2 as it is issued but not fully paid?
Submitted: 1 year ago.
Category: Law
Customer: replied 1 year ago.
I've attached the articles of association for your reference.
Expert:  Buachaill replied 1 year ago.

1. It is a fundamental rule of company law that you cannot pay a dividend on shares that have not been paid for. So, if there are shares which still have not been paid for, then you cannot pay a dividend on them. The shares must first be paid for before their owner can receive any dividend. Similarly, a dividend cannot be paid on uncalled up share capital. The consequences of a shareholder declaring and paying himself a dividend but the share capital remains unpaid is that there has been a fraud on the company and the shareholder has essentially stolen the property of the company. It is the same as if the director simply pillaged the company money. It is just unwise. Far better to simply pay up the £100 on the shares and do it properly thereby running the company in accordance with good corporate governance.

Expert:  Buachaill replied 1 year ago.

2. Ultimately if this state of affairs came to light, the director would get prosecuted for breach of company law.

Expert:  Buachaill replied 1 year ago.

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Customer: replied 1 year ago.
How can this be rectified then as the dividend has been paid and the shares were unpaid at the time of the dividend?
Customer: replied 1 year ago.
It is a private limited company so does that not change things?
Expert:  Buachaill replied 1 year ago.

4. Essentially, you should now pay up the shares and then re-declare the dividend. This will correct it for corporate governance requirements. People make mistakes all the time and the best thing to do is to realise that a mistake was made and to correct it. It makes no difference that it is a private limited company. The downside if you don't correct it is that you might firstly, lose the protection of limited liability if you are seen to ignore the proper running of the company. The classic statement is that limited liability is not like a drawbridge, where you raise and lower it at your convenience. Secondly, if your company has a creditor who is unpaid, the creditor might seek to get a receiver or liquidator appointed who would then reverse the dividend and obtains its recoupment. So, remedy it as soon as possible.

Customer: replied 1 year ago.
I spoke to the ICAEW who stated that unpaid uncalled up share capital can still have a dividend paid so I'm very confused to conflicting advice I'm receiving here.
Customer: replied 1 year ago.
If we redeclare the dividend, does the dividend still relate to the Fiscal Year it was originally declared?
Expert:  Buachaill replied 1 year ago.

5. That is not correct. I don't know who you spoke to but they are not a lawyer. secondly, if you re-declare the dividend you will have to incorporate it into the current fiscal year for the company.

Customer: replied 1 year ago.
Ok but that has implications for the statutory accounts as well as the dividends have already been accounted for in the prior year end accounts.
Expert:  Buachaill replied 1 year ago.

6. Yes, you need to restate the accounts for the company.

Customer: replied 1 year ago.
how do dividends work for partly paid shares then out of interest? e.g. only 20p in the £ has been paid for the share?
Expert:  Buachaill replied 1 year ago.

7. For a partly paid share, if 20p was paid in the £1 on the share, then a fifth of the dividend declared per share would get paid to the person holding this share. So, if a 10p dividend was paid, this shareholder holding the share would get 2p.

Customer: replied 1 year ago.
Can the accounts not retrospectively be changed so that the share capital is paid and the dividends remain as they are by reducing the Director's Loan Account?
Expert:  Buachaill replied 1 year ago.

8. I would suggest you speak to an accountant about re-declaring or altering accounts. Be aware that a set of accounts must present a "true and fair" position, so making false entries retrospectively will not be what most accountants will be very keen on.

Customer: replied 1 year ago.
Legally, would it be ok to complete SH01 form, backdate it to 17th June 2013 as this was never filed either? Then amend the accounts for the past 2 years. In the attached file, it actually states that the shares had been paid, but the accounting transaction had never been recorded correctly to reflect this, so is a mere minor change to the accounts.
Customer: replied 1 year ago.
It is on page 3 & 4 on the attached document where it states it has been paid. I did not set up this company so have limited history. I'm the accountant and company secretary for it, and am sorting out the mess!
Expert:  Buachaill replied 1 year ago.

9. If you the accountant, I would advise you to stay within the law. Don't account for something that isn't correct in fact.