Following the announcement of the income support measures, the Government has clarified that directors whose remuneration is subject to PAYE (as opposed to remuneration being drawn by a self-employed director) may be furloughed under the newly-announced Coronavirus Job Retention Scheme. This would, however, mean that the furloughed employed director would not be able to work for the furloughing company unless there were statutory requirements (not employment contract requirements) to do so.
The recently introduced Self-Employment Income Protection Measures however will impact owners and directors who are paid by dividends. It also appears that the Government’s Statutory Self-Employed Scheme will not benefit individuals working through their personal service company, as they may not qualify for assistance.
There is no doubt that the income and future profitability of some companies will be impacted by the measures imposed because of the pandemic. Directors must ensure that they continue to consider creditors and suppliers interests in the coming months and despite any immediate financial pressure, not react quickly and without considering the Company’s longer terms cash needs. If they become aware that their Company is, or is likely to become insolvent, and yet continue to pay distributions and/or dividends they will risk committing a breach of fiduciary duty under S172(3) of the Companies Act 2006.
There are guidelines that directors can use that will assist them in deciding whether paying a dividend is an acceptable step at this time. Now would also be a good time to examine any existing dividend policy to see if it is still fit for purpose.
Before making a dividend payment, directors should assess the solvency of a Company, ensuring that the accounts accurately portray the financial health of the Company taking into account any contingent and prospective liabilities.
Directors must also be able to show that the payment of any dividend would not be detrimental to the needs of the Company.
Insolvency practitioners are required to investigate any withdrawals of profits or funds from companies in a two year period (and sometimes longer) before a failure. Directors would do well to seek advice before taking dividends or loans during the pandemic.