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

Elm Ltd has accumulated realised profits of 400,000 brought forward and a loss of 100,000 realised in the current year. The directors propose a dividend of 350,000. Which statement is correct?

The dividend is unlawful because distributable profits are only 300,000, being 400,000 of accumulated realised profits less the 100,000 current-year realised loss. A proposed 350,000 exceeds this, and being solvent does not cure a breach of the profit requirement.

  1. AThe dividend is lawful because it is less than the brought-forward profits
  2. BThe dividend is unlawful because distributable profits are only 300,000Correct
  3. CThe dividend is lawful provided the company is solvent at the time

Explanation

Distributable profits are accumulated realised profits less accumulated realised losses, so 400,000 - 100,000 = 300,000. A dividend of 350,000 exceeds this by 50,000 and is unlawful. Solvency is relevant but does not replace the profit requirement.

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