There are strict rules governing the circumstances in which a company may pay a dividend to its shareholders, some of which could affect directors’ income.
Companies must have sufficient distributable reserves to pay the dividend at the time it is paid. Broadly, distributable reserves are accumulated profits from prior years that haven’t been paid out as dividends, together with current year profits/losses. In the current circumstances directors must be confident that the firm has built up sufficient profits, allowing for losses that may have arisen since the last year end, equal to or greater than the amount of the dividend to be declared.
The directors also need to consider whether, having regard to the whole of the Company’s business, and the actual and contingent liabilities inherent in the business, it is reasonably foreseeable that the dividend would cause the Company to be unable to pay its debts as they fall due. It would be unlawful for the directors to declare such a dividend.
These strict rules may be why many businesses and banks have taken the decision during this crisis to cancel dividend payments to their shareholders.
Whether a previously agreed dividend payment can be cancelled owing to any change in a company’s financial position may depend on how dividends are set and agreed on.
An interim dividend is decided on and announced by directors, which only becomes a binding obligation to shareholders of a company once it is paid.
A final dividend is one which is recommended by directors to shareholders that is approved by shareholders via an ordinary resolution and which is binding at the point of approval.
This latter classification of dividend may be more difficult to cancel and could be more likely to lead to action through the courts or other legal disputes, which is something shareholders should be aware of.
If you are a shareholder and you are concerned about dividend income it is best to speak with the organisation in which you hold shares to see what their intentions are for paying dividends this year so that you can make up for any shortfalls in your income.