Do directors need to check solvency before a dividend

Yes, in practice. The Companies Act test only asks whether the relevant accounts show enough distributable profits, but directors’ duties sit on top of that test. Once directors know, or ought to know, that the company is insolvent, bordering on insolvency, or that insolvent liquidation or administration is probable, they must give weight to creditors’ interests, and a dividend that passes the reserves test can still be a breach of duty.

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Why is having distributable reserves not enough?

Section 830 of the Companies Act 2006 says a company may only make a distribution out of profits available for the purpose: accumulated realised profits less accumulated realised losses. Section 836 says whether a distribution is lawful is determined by reference to items stated in the relevant accounts, usually the last annual accounts. That is a backward looking balance sheet test. It does not ask whether the company has the cash to pay the dividend, whether trading has collapsed since the year end, or whether a large liability is about to fall due.

A company can therefore have healthy distributable reserves on accounts drawn up nine months ago and still be unable to pay its debts today. The statute does not require directors to sign a solvency statement before a dividend. Compare section 643, which for a private company reducing capital requires each director to form the opinion that there is no ground on which the company could be found unable to pay its debts, and that it will be able to pay its debts as they fall due during the following year, taking into account contingent and prospective liabilities. No such statement is needed for a dividend, but the duties described below fill much of the same ground.

Which duties bring solvency into the decision?

Section 172(1) requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Section 172(3) says that duty has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors. Section 174 adds a duty to exercise the care, skill and diligence of a reasonably diligent person with the knowledge and experience expected of someone in the director’s role, and the director’s own knowledge and experience.

The rule of law referred to in section 172(3) is the creditor duty, explained by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25. Our page on the directors’ duty to consider creditors covers the case in full; the points that bear on dividends are below.

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What did Sequana say about dividends that are otherwise lawful?

Sequana was itself a dividend case. In May 2009 the directors of AWA caused it to pay a dividend of €135 million to its only shareholder, which complied with the requirements of Part 23. ICAS’s summary of the judgment records that the creditor duty can apply to a directors’ decision to pay a dividend which is otherwise lawful. It also records the trigger: the duty is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable.

Once engaged, the weight given to creditors increases with the company’s difficulties. The greater the financial difficulties, the more the directors should prioritise creditors’ interests, and where insolvent liquidation or administration is inevitable, creditors’ interests become paramount. On the facts the duty was not engaged: ICAEW’s report notes that AWA was solvent on both balance sheet and cash flow bases when the dividend was paid, with a real but not imminent risk of future insolvency. A remote or general risk is not enough; the check is about whether directors knew, or ought to have known, of actual or probable insolvency.

What should the solvency check cover?

There is no prescribed form, so directors should test the position against the two statutory measures of inability to pay debts in section 123 of the Insolvency Act 1986: whether the company can pay its debts as they fall due (section 123(1)(e)), and whether its assets exceed its liabilities taking into account contingent and prospective liabilities (section 123(2)). See insolvency tests for how each works. A sensible board paper covers:

current management accounts, not just the last statutory accounts, including any losses since the year end;
a cash flow forecast showing the dividend and the company’s known commitments, with corporation tax, VAT and PAYE dues shown on their actual dates;
contingent and prospective liabilities such as disputes, warranty claims, onerous leases or loan repayments, which section 123(2) requires to be counted;
bank covenants or lender consents that a dividend might breach;
whether the dividend will be paid in cash or credited to a loan account, and whether the shareholders are likely to draw it at once;
earlier distributions by reference to the same accounts, which section 840 requires to be added to the proposed one when testing it.

The section 643 wording is a useful benchmark: can the directors honestly say the company will be able to pay its debts as they fall due over the next twelve months after the dividend? If the honest answer is doubtful, the creditor duty may already be engaged and the dividend should be reduced, deferred or abandoned.

Does it make a difference whether the dividend is interim or final?

It does for timing. HMRC’s Company Taxation Manual at CTM15205 explains that a final dividend properly declared without a later payment date creates an immediately enforceable debt, while an interim dividend may be varied or rescinded at any time before payment. Directors who decided an interim dividend in good times can therefore cancel it if the position worsens before payment, and should do so if paying would breach their duties. A final dividend payable on a future date is a debt from that date, so the solvency check should be done before it is declared. See interim and final dividends.

What happens if the company fails after the dividend?

A liquidator will look closely at dividends paid in the run up to insolvency. If the dividend was unlawful because reserves were insufficient, section 847 makes a member who knew or had reasonable grounds for believing it was unlawful liable to repay it. If reserves were sufficient but the creditor duty was engaged and ignored, the claim is against the directors for breach of duty: section 212 of the Insolvency Act 1986 lets the liquidator, or a creditor, ask the court to compel a director to repay or contribute compensation for misfeasance or breach of fiduciary or other duty. Continuing to trade and pay out after the point where there was no reasonable prospect of avoiding insolvent liquidation can also lead to a wrongful trading claim under section 214. More on personal exposure is on unlawful dividends and director liability.

How might this look in practice?

Illustration only. A company’s accounts to 31 March show distributable reserves of £180,000. In November the two director shareholders want a £100,000 dividend. Management accounts show losses of £60,000 since the year end, cash of £70,000, a corporation tax payment of £30,000 due in January, and a customer threatening a £50,000 claim the directors think is likely to succeed.

The reserves test on the last annual accounts is passed: £100,000 is less than £180,000.
The cash test is not. Paying £100,000 is impossible from £70,000 without borrowing, and even a smaller dividend would leave little for the tax bill and the probable claim.
Counting the likely claim and the losses, net assets may be close to nil, so insolvency is at least a realistic prospect.

The directors should not pay £100,000. They might pay a modest dividend that leaves the forecast comfortably positive, or wait until the claim is resolved, and minute the reasoning either way.

What mistakes come up most often?

Treating the reserves figure on the last accounts as permission to pay, without looking at losses or cash since; see dividends after a loss making year.
Crediting dividends to director loan accounts and treating them as paid while the company could not actually meet them.
Ignoring tax liabilities because they are not yet due.
Assuming the creditor duty only applies once a company is formally insolvent; Sequana says it is engaged earlier, when insolvency or an insolvent process is probable.
Recording no reasoning at all. A short minute showing the forecast and the conclusion is the best evidence that the directors considered solvency properly.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.