Dividends and non payment

[HonestLie]

Wondering if anyone can help.

The directors of a company are taking fairly hefty dividends but are non payers for freelancers. Months late due to "financial struggles".

My understanding is dividends are taken from company profit. However, if they are failing to pay freelancers surely the dividends are getting taken from the freelancer pool of money and not dividends.

Is this illegal?

Anyone?

Dividends should be taken after all company bills are paid, yes - they come out of the profit (after tax).

Freelancer invoices are company bills, and should be paid before the profit can be calculated. So, until bills are paid, there is no knowing how much profit there is to pay tax on and then share out as dividends to the shareholders (often directors).

However, it is fairly common that dividends will be taken out of a small company on an ad-hoc basis, based on a rough calculation. Its fine as long as the money will be there at the end of the accounting period, and people tend to bank on this balancing out over the year. There is no particular 'freelancer pool of money' - its up the company to manage its money over the financial year.

It only gets illegal when the company comes to file its accounts and tax return and can't pay, or if it doesn't pay it's bills and gets either taken to court or the creditors (unpaid people/companies) file to make the company bankrupt. At this point, the official receiver is called in and can decide that the people have acted illegally, and penalise them (can force sale of assets to pay bills, and/or disqualify them from being a director)

If you are waiting to be paid, and its been a long time, and you've sent a letter asking for the payment, then send another warning that you will take legal action if not paid. If this doesn't work, depending on the amount owed, go to the small claims court (up to £10k, can be done online, I think)

Hope this helps

I work as permanent staff for the company but what they are doing really doesn't sit well with me. Some freelancers haven't been paid for work completed in July. There are complaints and legal threats rolling in but after a discussion that took place today many workers are wanting to complain about the way the freelancers have been treated and the directors taking dividends that should have been used to pay freelancers

invoices... should be paid before the profit can be calculated

Not true. The profit should be calculated on an accruals basis which means invoices are taken as expenditure regardless of whether or not they have actually been paid. Any unpaid invoices appear on the balance sheet as part of the current liabilities.

If the company is owed more money by customers than it owes to suppliers the directors are not doing anything wrong. However, if they are trading while the business is insolvent and there is no hope of recovery there is a problem. If the company collapses and the liquidator decides the directors have acted irresponsibly, which could include paying themselves dividends when there was no chance of generating enough cash to pay suppliers, they could be disqualified from acting as company directors and may be held personally liable for the company's debts.

Sorry, yes, the profit can be calculated on accrued spend, and expected income would be taken into account. I wasn't clear enough, but you get the gist.

Thanks. It's shit that nothing can be done but I appreciate the advice non the less.

I have actually just realised, we use a factoring company. The % that is held back so still due isn't enough to cover debts owed to freelancers. Does this make a difference?

Should say they are still trading which involves daily accrual of debt with regards to freelance payments knowing they can't pay. They hope they will be in a position to do so at some point but know the cannot at the moment in line with their payment terms they set out.

Many companies go through periods where they are technically insolvent but by juggling things they are able to survive until business picks up and they become solvent once again. There is no problem with the company continuing to trade in that situation, even though it means suppliers (including freelancers) may have difficulty getting paid. However, if there is no realistic hope of recovery the directors could be storing up trouble for themselves.

I should also add that if the company is experiencing cash flow difficulties the directors must be careful about who they pay. The freelancers are unsecured creditors. That means they come some way down the priority list for payment. It also means that if the company collapses they may only get a small portion of the money they are owed.