ExpertMedium2 marksMultiple Choice
ACCA · Question 15 · Capital and the financing of companies
Section A
A company declares and pays a dividend to its shareholders. It is later discovered that the company did not have sufficient distributable profits to cover the dividend. What is the legal consequence for a shareholder who received this unlawful dividend, assuming they knew or had reasonable grounds to believe it was unlawful?
Section A
A company declares and pays a dividend to its shareholders. It is later discovered that the company did not have sufficient distributable profits to cover the dividend. What is the legal consequence for a shareholder who received this unlawful dividend, assuming they knew or had reasonable grounds to believe it was unlawful?
Answer options:
A.
The shareholder is allowed to keep the dividend, but the directors are fined.
B.
The shareholder must repay the dividend to the company.
C.
The shareholder must transfer their shares back to the company.
D.
The dividend is automatically converted into a loan from the company.
How to approach this question
Identify the statutory consequence for shareholders who knowingly receive an unlawful distribution.
Full Answer
B.The shareholder must repay the dividend to the company.✓ Correct
Section 847 of the Companies Act 2006 states that if a distribution (dividend) is made in contravention of the rules (e.g., without sufficient distributable profits), and the member knows or has reasonable grounds to believe it is unlawful, they are liable to repay it to the company.
Common mistakes
Assuming only the directors are liable. While directors who authorize unlawful dividends breach their duties, shareholders who *knowingly* receive them must repay.
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