Explain The Rules Governing The Distribution Of Dividends 2 / 2

Private Companies

These can issue dividends out of accumulated realised profits

Public Companies

These can issue dividends out of accumulated realised profits less accumulated Unrealised losses

So, a private company may only pay dividends out of its retained earnings as a dividend

A public company must further deduct things like negative revaluation reserves.

Unlawful Distributions

  • If directors authorised knowingly an unlawful dividend they will be liable personally.

  • If a shareholder knew it was an unlawful dividend - they are liable to pay it back

  • If the company's auditors advised the unlawful dividend policy - they are liable for professional negligence.