Corporate and Business Law (Global) · Capital maintenance and dividend law

Distributions and Distributable Profits in Company Law

Updated 11 October 2026 · Fact-checked

A distribution is any transfer of company assets to members, usually a dividend, that is not repaid capital. A company may distribute only from accumulated realised profits less accumulated realised losses. A public company must also keep net assets at least equal to called-up share capital plus undistributable reserves, both before and after paying.

Understand Distributions and Distributable Profits

A distribution is any way a company hands value to its members out of its assets, other than certain permitted capital transactions. The usual example is a cash dividend. A transfer of an asset to a member for less than its value can also be a distribution.

The law protects creditors. Creditors lend to a limited company knowing the members cannot walk away with the capital. So a company may pay distributions only out of profits that have really been earned. This is the capital maintenance idea in action.

The core rule applies to every company, private or public. A company may make a distribution only out of accumulated, realised profits, so far as not already distributed or capitalised, less accumulated, realised losses, so far as not written off in a reduction or reorganisation of capital. Think of two running totals: realised profits and realised losses, both counted from the start of the company's life, not just this year. Past losses must be made good first.

A realised profit is one that is realised in cash or in assets whose ultimate cash realisation is reasonably certain, as determined by generally accepted accounting principles. An unrealised profit, such as a revaluation surplus on land that has not been sold, cannot be distributed. Unrealised losses are different: in general, a loss on revaluation is not treated as a realised loss for the test unless the fall is a permanent diminution that must be charged to profit or loss.

Public companies face an extra test. After the distribution, the company's net assets must be at least equal to its called-up share capital plus its undistributable reserves. A public company may not pay a dividend that would reduce its net assets below that figure. Undistributable reserves include the share premium account, the capital redemption reserve, and the excess of accumulated unrealised profits over accumulated unrealised losses.

Key formulas to remember

Core rule for all companies: Distributable profits = accumulated realised profits − accumulated realised losses; Both totals run from incorporation, net of amounts already distributed or capitalised. Applies to private and public companies.
Extra test for public companies: Net assets after distribution ≥ called-up share capital + undistributable reserves; Applies in addition to the core rule. A public company must satisfy both.
Net assets: Net assets = total assets − total liabilities; Use the figure after deducting the proposed distribution.
Undistributable reserves: Share premium + capital redemption reserve + (accumulated unrealised profits − accumulated unrealised losses) + any reserve the law or constitution bars from distribution; The unrealised element counts only where unrealised profits exceed unrealised losses.
Unlawful distribution link: A member who knew or had reasonable grounds to believe the distribution was unlawful may have to repay it; Directors who authorise an unlawful dividend may also face liability. See the related topic on unlawful dividends.

How to solve Distributions and Distributable Profits questions

Use this method for any question on whether a company can lawfully pay a dividend or make another distribution.

1Decide if the payment is a distribution. Cash dividends are. Returning capital in a lawful reduction, bonus shares and lawful buybacks or redemptions funded as the law allows are not treated as unlawful distributions in the same way.
2Sort the figures into realised profits, realised losses, unrealised profits and unrealised losses. Ignore share capital and share premium for the first test.
3Compute accumulated realised profits minus accumulated realised losses. Include prior years, not just the current year.
4Compare the proposed dividend with that figure. If it is higher, the dividend is unlawful for any company.
5If the company is public, calculate net assets after the dividend and compare with called-up share capital plus undistributable reserves.
6State the result for each test, then give a clear conclusion: the maximum lawful dividend, or that the dividend is unlawful.
7If unlawful, note the likely consequence: recovery from members who knew, and possible director liability.

Quickest way: Two-test shortcut for objective questions

When to use it: Use in Section A or Section B-style questions that give a list of balances and ask for the maximum lawful dividend or whether a payment is allowed.

Underline the word public or private first. This decides whether you need one test or two.
Ignore revaluation surpluses and share premium when finding realised profit.
Net realised profits against realised losses brought forward. A negative result means no dividend.
For a public company, find the cap from the net asset test: net assets − (share capital + undistributable reserves). The maximum dividend is the lower of this and the realised profit figure.
Pick the option matching the lower figure. Check the answer is not simply total reserves.

Common mistakes in Distributions and Distributable Profits

Treating a revaluation surplus as distributable
It sits in reserves and looks like profit.
Fix: Ask if it is realised. An unsold revaluation is unrealised and cannot be distributed.
Using only the current year's profit
Students think of dividends as paid from this year's earnings.
Fix: The test is accumulated realised profits less accumulated realised losses from the start. Earlier losses reduce what you can pay.
Applying the net asset test to private companies
Both rules are learned together and get blended.
Fix: The net asset test is an extra restriction for public companies only. Private companies need only satisfy the realised profits rule.
Forgetting to deduct the dividend when testing net assets
Students use the balance sheet as it stands.
Fix: The public company test is applied after the distribution. Subtract the proposed dividend from net assets.
Counting share premium as distributable
It is a reserve and looks like spare money.
Fix: Share premium is capital and is undistributable. It also counts in the public company test.
Taking the higher of the two limits for a public company
Students stop after finding one figure.
Fix: A public company must pass both tests, so the maximum dividend is the lower of the two limits.

Worked examples

Example 1

Alba Ltd, a private company, has accumulated realised profits of $400,000, accumulated realised losses of $150,000 and an unrealised revaluation surplus of $200,000. What is the maximum dividend it can lawfully pay?

Show the solution

Alba is private, so only the realised profits rule applies.
Distributable profits = $400,000 − $150,000 = $250,000.
The $200,000 revaluation surplus is unrealised and is ignored.

Answer: $250,000

Example 2

Borus plc has called-up share capital of $500,000, share premium of $100,000, accumulated realised profits of $300,000, no realised losses, and unrealised profits of $50,000 with no unrealised losses. Net assets are $950,000. What is the maximum lawful dividend?

Show the solution

Test 1, realised profits: $300,000 − $0 = $300,000.
Undistributable reserves = share premium $100,000 + unrealised profits $50,000 = $150,000.
Test 2: net assets after dividend must be at least $500,000 + $150,000 = $650,000.
Maximum dividend under test 2 = $950,000 − $650,000 = $300,000.
The maximum is the lower of $300,000 and $300,000, so $300,000.
Check: after paying $300,000 net assets are $650,000, which equals the minimum, so the test is met.

Answer: $300,000

Exam tips

Check public or private before doing any arithmetic. It decides how many tests you need.
In objective questions, expect distractors that include unrealised profits or share premium. Exclude them from realised profit.
Remember the net asset test is applied after the dividend, so deduct it before comparing.
In written or multi-task answers, show each test separately, then state the conclusion. Examiners reward clear structure.
Link to consequences when asked: a member who knew of the unlawful payment may have to repay it.

Practice questions from Capital maintenance and dividend law

Distributions and Distributable Profits: frequently asked questions

What counts as a distribution under company law?

A distribution is any payment of company assets to members, whether in cash or otherwise, except certain lawful capital transactions. Typical examples are cash dividends and transferring an asset to a member at an undervalue. Lawful reductions of capital and properly funded buybacks are treated differently.

What is the difference between realised and unrealised profits for dividends?

A realised profit is one received in cash or in assets that can reasonably be turned into cash, judged by accounting principles. An unrealised profit exists on paper only, such as an unsold asset revalued upwards. Only realised profits can support a dividend.

What is the net assets test for public companies?

A public company must keep its net assets at least equal to its called-up share capital plus undistributable reserves after paying the distribution. This is on top of the realised profits rule. It stops a public company eroding its capital base.

How do I calculate distributable profits in the exam?

Add accumulated realised profits and subtract accumulated realised losses, ignoring unrealised items and share premium. If the company is public, also apply the net asset test and take the lower resulting limit. Show each step so you can earn marks in constructed responses.