Money and value leave a company to its shareholders only through Division 3 of Part VI of the Companies Act 1997. Section 50 is its gateway.
Section 50(1) — the board’s power
The board of a company that is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test may, subject to section 51 and the constitution, authorise a distribution at a time, and of an amount, and to any shareholders it thinks fit.
Note the elements. The test is forward-looking — will the company satisfy the test immediately after the distribution. The belief must be on reasonable grounds. And the power is the board’s, not the shareholders’: shareholders cannot vote themselves a dividend.
Section 50(2) — the solvency certificate
The directors who vote in favour of a distribution shall forthwith sign a certificate stating that, in their opinion, the company will, immediately after the distribution, satisfy the solvency test, and the grounds for that opinion.
The certificate is not a form of words. It must state why the directors hold the opinion — the financial statements relied on, what has changed since, the cash flow position, the contingent liabilities and their assessment. That record is the director’s defence if the distribution is later challenged under section 54.
Every director who fails to comply with subsection (2) commits an offence, with the penalty in section 413(1) (s 50(5)).
Section 50(3) — if things change before payment
Where, after a distribution is authorised and before it is made, the board ceases to be satisfied on reasonable grounds that the company will satisfy the solvency test immediately after it is made, any distribution made by the company is deemed not to have been authorised.
The obligation is continuing. A dividend declared in March and paid in June must still be justified in June. If the position deteriorates, the board must stop the payment — and a director who ceased to be satisfied and failed to take reasonable steps to prevent the distribution is personally liable under section 54(3) to repay so much as cannot be recovered from shareholders.
Section 50(4) — the solvency test, adjusted
| Term | Includes | Excludes |
|---|---|---|
| “Debts” | Fixed preferential returns on shares ranking ahead of those receiving the distribution | Those returns where the constitution expresses them as subject to the directors’ power to make distributions; and debts arising by reason of the authorisation itself |
| “Liabilities” | The amount that would be required, if the company were removed from the register after the distribution, to repay all fixed preferential amounts payable to shareholders then or on earlier redemption | Those amounts where expressed in the constitution as subject to the directors’ power; and — subject to the debts rule — dividends payable in the future |
It stops ordinary shareholders being paid ahead of preference shareholders by treating the preference entitlements as debts and liabilities for the purposes of the test. And it prevents the circularity of counting the distribution itself as a debt that defeats the test.
What counts as a distribution
The concept is wider than a dividend. Under section 51(1), a dividend is a distribution other than one to which section 56 or section 63 applies. So the family is:
- Dividends — sections 51 to 53;
- Acquisition of the company’s own shares — section 56;
- Financial assistance to acquire its own shares — section 63;
- Redemption of shares — sections 59 to 62; and
- Reductions of shareholder liability — section 55.
Section 53 deals separately with shareholder discount schemes: a discount accepted under a scheme the board has properly approved is not a distribution (s 53(4)) — but if the board had ceased to be satisfied of solvency when the scheme was approved or the discount offered, section 54 applies to the discount as if it were an unauthorised distribution (s 53(5)).
Section 55 — reducing a shareholder’s liability is a distribution
Where a company proposes to alter its constitution, acquire its own shares, or redeem shares under section 60, in a manner which would cancel or reduce the liability of a shareholder to the company in relation to a share held before that step, the proposed cancellation or reduction is treated —
(a) for the purposes of section 50, as if it were a distribution; and
(b) for the purposes of section 51(2) and (3), as if it were a dividend.
Subsection (2) applies the same treatment for section 54 purposes once the step has been taken, measured by the amount by which the liability was reduced. Subsection (3) extends the principle to amalgamations: where a shareholder’s liability to an amalgamating company is greater than their liability to the amalgamated company, or is cancelled by the cancellation of the share, the reduction is treated as a distribution by the amalgamated company — whether or not that shareholder becomes a shareholder of the amalgamated company.
Without it, a company could achieve indirectly what section 50 forbids directly: instead of paying cash out, it could simply write off what the shareholders still owe on their shares. Section 55 closes that route by putting every such reduction through the same solvency machinery.
It is also the reason section 33(2) makes the power to alter a constitution expressly “subject to section 55”.
Authorising a distribution — board checklist
- Check the constitution and section 51 for any restriction on the distribution proposed.
- Work through the solvency test as modified by section 50(4), from compliant financial statements plus everything known since.
- Prepare a cash flow forecast — limb (a) of the test is about paying debts as they fall due.
- Resolve to authorise the distribution, recording the reasoning.
- Sign the certificate forthwith, stating the opinion and the grounds.
- Re-check before payment. Section 50(3) makes the authorisation lapse if the board ceases to be satisfied.
- Keep the working papers — they are the answer to a section 54 claim years later.
Sources
- Companies Act 1997 — ss 4, 33, 50–56, 59–63, 413
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.