FLK1 · Multiple-choice practice
FLK1 Business Law — Question 8
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Cancun Ltd is a travel services company. The company has operated for a number of years but had a very successful run in the last season and the directors are considering distributing a dividend to its newest shareholders, to reward them for investing in the business. Which of the following statements is correct regarding the process for distributing dividends?
Answer and explanation
Correct answer: B. Dividends can only be distributed if the company has profits available for distribution, according to the types of shares available.
Under the Companies Act 2006, dividends can only be paid out of profits available for distribution. This means that a company’s distributable profits must be sufficient to cover any proposed dividend. The company’s accounts must be reviewed to determine whether there are sufficient distributable profits available. The directors must also ensure that they comply with the company’s articles of association in relation to the payment of dividends. Different classes of shares may benefit from differential treatment in the payment of dividends, but payments cannot discriminate between shareholders in the same class at will. If dividends are paid when there are insufficient profits available for distribution, this could result in the company being unable to meet its debts as they fall due, which could lead to insolvency.
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