Can a company in debt pay a dividend?

Only if it genuinely has distributable profits, and that is where struggling companies get caught. The rule under the Companies Act is that dividends can only be paid out of accumulated realised profits, judged by reference to the company's accounts. Debt alone does not bar a dividend: a profitable company with a loan can pay one lawfully. But a company that is losing money, balance-sheet insolvent, or unable to pay its bills usually has no distributable profit left, and a dividend declared anyway is unlawful. The consequences are personal: unlawful dividends can be clawed back by a liquidator, and where directors paid themselves, the payments are commonly re-characterised as an overdrawn director's loan account owed back to the company. Once the company is insolvent or nearly so, your duty runs to creditors, and paying shareholders ahead of them is the exact behaviour the law targets. If dividends are part of how you pay yourself, the moment the company starts struggling is the moment to pause them and take advice.

The profits test, in plain terms

A dividend is a distribution of profit, so there must be profit to distribute: accumulated, realised profits net of losses, supported by the company's accounts at the time of payment. A company can hold debt and still pass this test. What it cannot do is pay dividends from capital, from borrowing, or from hope. If the last accounts show losses that wipe out reserves, there is nothing to distribute until profitability genuinely recovers.

Why this bites small-company directors

The typical owner-director pays a small salary topped up with dividends. When trading declines, the habit continues, but the profits behind it have gone. In a later liquidation, the liquidator reviews those payments: unlawful dividends are recoverable, and in practice they are often converted into an overdrawn director's loan account that you owe back personally. Related conduct can also support misfeasance claims. What felt like normal remuneration becomes a personal debt at the worst possible time.

The insolvency overlay

Separately from the profits test, once the company is insolvent or insolvency is probable, your duty as a director shifts to creditors. Paying money out to shareholders, including yourself, at that point sits alongside wrongful trading and preference risk. The safe sequence when a company in difficulty wants to keep paying its directors: check solvency honestly with the insolvency test, stop dividends if the profits are not there, and take advice from a Licensed Insolvency Practitioner about the company's options while there still are some.

Dividends and company debt: common questions

What makes a dividend unlawful?

A dividend is unlawful if the company did not have sufficient distributable profits, shown by its accounts, at the time it was declared. Being in debt does not automatically bar a dividend, but having no accumulated realised profit does. A dividend paid without distributable profit is unlawful regardless of good intentions.

What happens to unlawful dividends in a liquidation?

The liquidator reviews dividends paid before the failure. Unlawful dividends can be reclaimed from shareholders who knew or had reasonable grounds to know the position, and where director-shareholders paid themselves, the amounts are commonly treated as owed back to the company, often re-characterised as an overdrawn director's loan account which the liquidator pursues personally.

I pay myself a small salary and dividends. What should I do if the company is struggling?

Take stock before the next dividend. If the company's accounts no longer show distributable profit, or the company is insolvent or close to it, stop dividends and take advice on remuneration. Continuing the salary-plus-dividend habit into insolvency is one of the most common sources of personal liability for small-company directors.

Can I pay a dividend if the company has a Bounce Back Loan or other borrowing?

Borrowing does not by itself prevent a dividend, but the profits test still applies and so does your duty to creditors once insolvency threatens. Paying dividends out of borrowed money in a company with no distributable profit is exactly the kind of payment liquidators and lenders challenge, and with Bounce Back Loans in particular it is scrutinised closely.

This is general information, not legal, tax or financial advice. Whether a dividend is lawful depends on the company's accounts and position at the time. Speak to your accountant and, if the company is in difficulty, a Licensed Insolvency Practitioner. Last reviewed July 2026.