What are unlawful dividends?

Julie Palmer

Managing Partner and Licensed Insolvency Practitioner

Updated

5 August 2026

Dividends are unlawful when insufficient profits exist within the company to cover the amounts paid. Rules regarding the payment of dividends are laid down in the Companies Act, 2006 which states, “a dividend or distribution to shareholders may only be made out of profits available for the purpose.”

Additionally, a dividend may be deemed illegal if:

• Authorisation has not been provided in the correct format: minutes from a board meeting held to sanction the release of a dividend should confirm directors’ consideration of profit levels available prior to authorisation being given. Even if you are a sole director, these minutes are needed to satisfy HMRC requirements.
• A dividend voucher has not been completed: this is a ‘receipt’ for tax purposes. It should show the dividend rate per share, dividend figure, and the amount of tax credit.

A term sometimes used to describe an illegal dividend is ‘ultra vires,’ which means ‘beyond the powers.’ In other words directors do not, in reality, have the power to authorise such a payment from company funds.

Dividends deemed illegal by HMRC may be classified as salary, on which National Insurance and tax becomes due. Therefore, if you take a regular dividend in this way, you need to ensure that company profits can support the payment on each occasion and you do not take too much money out of the company via dividends.

“Unlawful dividends are a frequent issue we encounter during liquidation investigations. In many cases, the director had no idea the dividend was illegal and they were simply taking a regular amount each month based on what they thought the company could afford, without formally checking whether distributable profits existed. The issue only surfaces when the company enters formal insolvency proceedings and we review the records.”
— Julie Palmer, Partner, BTG Begbies Traynor

In what circumstances might dividends be paid illegally?

• Miscalculation of profits or the use of an incorrect figure sometimes leads to illegal dividends being issued, as can failure to complete board meeting minutes and the dividend voucher described above.
• Poor record-keeping could easily lead to their issue, both in terms of the administrative and financial paperwork required prior to authorisation.
• It would be considered a fraudulent activity by HMRC to backdate authorisation for previously issued dividends. If this was discovered, penalties and/or fines would be applied.

Declaring lack of knowledge or awareness of the rules surrounding dividend payments does not exclude you from being held personally liable for business debt as a company director.

What happens if your company becomes insolvent?

The obligation for directors to act in a proper manner places them at serious risk of liability should the company become insolvent. If a dividend has been paid unlawfully, it may not have been apparent to those making or in receipt of the payment, but does not alter where liability is placed, i.e. on the shoulders of directors.

A healthy cash flow and existing profits sometimes lead to a mistaken sense of security. Directors working under a genuine belief that their company is solvent, may find on further investigation that a future liability such as Corporation Tax projects a different picture, and places the company in an insolvent position.

Directors who didn't know and had no reasonable grounds to believe the dividend was unlawful may have a defence against repayment. This is known as a "knowledge defence" and is covered in section 847 of the Companies Act 2006.

The connection between unlawful dividends and overdrawn directors' loan accounts

If an unlawful dividend is paid and the company cannot recover it, the amount will typically be recorded as an entry on the director’s loan account (DLA). This means the director owes the money back to the company.

In formal insolvency proceedings, the liquidator will treat this as an asset of the company and pursue repayment, potentially through both directors' loan account recovery and misfeasance proceedings under section 212 of the Insolvency Act 1986.

For directors who have been taking regular dividends without checking distributable profits, this can result in a substantial overdrawn directors' loan account that they were not aware of. In our experience, directors are often genuinely shocked to discover that dividends they took in good faith are classified as unlawful. For more detail on how overdrawn directors' loan accounts are treated in insolvency, see our guide to overdrawn directors’ loan accounts.

What are the potential repercussions for company directors?

HMRC will argue that you knew or should have known a dividend was illegal. It is a duty in directorship to be aware of your company’s financial position at all times, and responsibility for this stops with the directors.

This obligation becomes an inherent part of insolvency. Continuing to trade whilst insolvent, however well-meaning your actions as a director, is a serious offence that fails to put creditor interests first.

When insolvency is combined with the payment of unlawful dividends, directors will face huge pressure to justify their actions on both counts. It is imperative that you consult a licensed insolvency practitioner for advice should you fear your company is approaching insolvency and/or the issue of illegal dividends.

“When we’re appointed as liquidator, one of our standard checks is whether any dividends paid in the period leading up to insolvency were lawful. If they weren’t, we have a duty to pursue repayment on behalf of creditors. The amounts can be significant, particularly where a director has been taking regular dividends over an extended period without distributable profits to support them.”
- Julie Palmer, Partner, BTG Begbies Traynor

What to do if you think you’ve taken an unlawful dividend

1. Check your distributable profits position. Ask your accountant to prepare or review interim accounts showing the company’s accumulated realised profits less accumulated realised losses at the date each dividend was paid. This will establish whether any dividends exceeded the available profits.
2. Repay any unlawful amount if you can. If you can afford to repay the unlawful dividend to the company, doing so before insolvency significantly reduces your exposure. The amount should be credited back to your director’s loan account.
3. Stop taking further dividends until the position is clarified. If there is any doubt about whether distributable profits exist, do not authorise or take any further dividends until your accountant has confirmed the position.
4. Ensure board minutes are in place for all future dividends. Document the distributable profits assessment, the board’s decision, and the dividend voucher for every dividend payment going forward. This paper trail is your protection.
5. Seek professional advice if the company is in financial difficulty. If you’ve taken unlawful dividends and the company is approaching a position of insolvency, you need specialist advice on how to manage your position. The earlier you act, the more options are available.

If you’re concerned about dividends your company has paid, or if your company is in financial difficulty and you’re unsure about your personal position, getting advice early is the most effective step you can take.

Unlawful dividends are a common issue, and in many cases the situation can be resolved before it reaches the insolvency stage.  Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation.