Capital maintenance

Original recommendation

The Brydon Review recommended that the directors, in proposing a dividend, would need to make a statement that the payment of the dividend in no way threatened the existence of the company in the ensuing, say, two years in the light of the risk analysis undertaken. It recommended that the directors should also confirm that this statement was consistent with the Resilience Statement, had been assured in accordance with the Audit and Assurance Policy and that the dividend was within known distributable reserves. The Bryden Review indicated that [A] dividend can only be recommended by the directors if the level of the distributable reserves is established and payment of that dividend is consistent with obligations of the directors under the Companies Act and consistent with the Resilience Statement. (Source: Brydon 19.7 & 19.8)


In the White Paper the following reforms are proposed (Section 2.2) in relation to dividends and capital maintenance:

  • companies (the parent company in the case of a group) should disclose the total amount of reserves that are distributable, or – if this is not possible – disclose the “known” distributable reserve, which must be greater than any proposed dividend;
  • in the case of a group, the parent company should provide an estimate of distributable reserves across the group; and
  • directors should state that any proposed dividend is within known distributable reserves and that payment of the dividend will not, in the directors’ reasonable expectation, threaten the solvency of the company over the next two years.

Views are invited on proposals to give ARGA new powers in relation to how companies should calculate their distributable reserves. Currently, guidance in this area rests with the professional accountancy bodies.

Government response

The Government intends to require qualifying companies or, in the case of a UK group, the parent company only, to disclose their distributable reserves, or a “not less than” figure if determining an exact figure would be impracticable or involve disproportionate effort. Those in scope will be PIEs with 750 or more employees and an annual turnover of at least £750m. Companies will be asked to provide a narrative explaining the board’s long-term approach to the amount and timing of returns to shareholders (including dividends, share buybacks and other capital distributions) and how this distribution policy has been applied in the reporting year. The Government also intends to require directors of such companies to make an explicit statement confirming the legality of proposed dividends and any dividends paid in-year.

Disclosing an estimate of the dividend-paying capacity of the group as a whole will be encouraged rather than a required element of reporting. The Government will task ARGA with issuing guidance on what should be treated as “realised” profits and losses for the purposes of determining distributable reserves.

The Government has decided not to proceed with the proposal for a directors’ assurance that a dividend would not be expected to jeopardise the future solvency of the company over a period of two years.

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