Ireland · Shares, company capital and dividends

Profits available for distribution, declaring a dividend and making a bonus issue

the Companies Act 2014 · sections 117, 118, 120, 121 and 124 to 126

The question is never whether the company has cash. It is whether it has profits available for distribution, tested in the way section 121 requires. Whether a distribution may be made without contravening section 117, and how much may be distributed, is determined by reference to the relevant items as stated in the relevant financial statements (section 121(1)). Where the last financial statements are the only relevant statements, they must have been properly prepared, or have been so prepared subject only to matters that are not material (section 121(3)).

Development costs are the trap most often missed. Where development costs are shown as an asset in the financial statements, the amount shown for those costs is treated as a realised loss for the purposes of section 117 (section 120(1)). A company that carries capitalised development costs and pays out to the full accumulated profit figure has almost certainly paid too much.

Section 117 sets the rule that a company may make a distribution only out of profits available for that purpose, and section 118 governs the treatment of certain items in arriving at that figure. Section 120 deals with development costs, and section 121 sets the relevant financial statements against which the calculation is made, including the use of interim and initial financial statements where the last statutory financial statements will not support the distribution.

Declaration is a separate step from calculation. A company may declare dividends by ordinary resolution, but a dividend may not exceed the amount recommended by the directors (section 124(2)). Subject to the rights of any class entitled to a special dividend right, dividends are declared and paid according to the amounts paid or credited as paid on the shares (section 124(4)). Sections 125 and 126 govern the further mechanics, including capitalisation of profits for a bonus issue.

Files 16 and 17 of the IE-COMPANY package cover this situation. File 16 works through the profits available for distribution: which financial statements are the relevant ones, whether they were properly prepared, how development costs and revaluations were treated, and what the resulting distributable figure is. File 17 works through the declaration and payment itself, the directors' recommendation, the resolution, the class rights applied and any bonus issue.

This situation is covered by these files from the pack IE-COMPANY

• File 16 · Profits available for distribution and the relevant financial statements
• File 17 · Declaration and payment of dividends and bonus issues

ComplianceSME tracks the Companies Act 2014 and issues update files through the membership, so that you are never working from a superseded version. Membership

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