What Is A Dividend In Specie? An In-Depth Guide
You might know what a distribution in specie is, but what is a dividend in specie?
Sometimes, the term ‘in specie’ causes confusion. From Latin it translates to ‘in its actual form’ and is often used interchangeably in law with ‘in kind’.
What does that mean in practice though – what is a dividend in specie exactly? And what does it mean in the context of a voluntary company liquidation?
To understand this, the best place to start is by comparing it to a distribution in specie.
What is a distribution in specie?
We’ve written previously about distribution in specie, so take a look at our guide to find out more about it and the link with overdrawn director’s loan accounts in particular.
A distribution in specie is the transfer of assets in their current form, rather than for an equivalent cash value.
They could be physical assets such as land or equipment, or simply non-cash financial assets including stocks.
When cash isn’t readily available, that’s when a distribution in specie often comes into play.
What is a dividend in specie?
So how is a distribution in specie any different to the topic we’re covering in this article, what is a dividend in specie?
Technically, if the dividend is declared in cash, then satisfied by an asset transfer – that’s a dividend in specie, meaning that there’s a difference between the situation before and after the transaction.
There are several reasons why a business may opt for a dividend in specie instead of cash. We recommend speaking to an insolvency practitioner to work out what’s best for your own business’ specific situation.
The law around both matters of distribution in specie and dividend in specie are set out in the Companies Act 2006.
Dividend in specie and Members’ Voluntary Liquidations
Now we’ll take a look at the significance of a dividend in specie process in the context of a solvent company going through a liquidation procedure.
This is a Members’ Voluntary Liquidation (MVL) and there are several reasons why solvent businesses might consider one:
- The business is solvent but not profitable
- The business has fulfilled its purpose
- A merger has been agreed
- Directors want to retire or stop managing the business
- Directors want to close down the business while distributing money and assets in a tax-efficient manner
Directors first need to draw up a declaration of solvency, stating their belief that the business can pay back any debts and interest within a year. Sworn under an oath and in a solicitor’s presence, the declaration of solvency must be signed within five weeks from the liquidation date and also include:
- The company’s name and address
- Company directors’ names and addresses
- How long (up to 12 months) the business needs to pay its debts
- A list of current property, assets and liabilities
The resolution also needs to be delivered to Companies House and then advertised in The Gazette within 14 days.
Once any creditors have been paid, remaining funds and assets are ultimately delivered to the shareholders, usually within six months.
In situations where the business is cash poor but asset rich, then one consideration is for one or more shareholders to receive a dividend in specie, meaning that:
- They receive non-cash assets, of an equal amount, instead
- The dividend was previously declared in cash but is now realised via asset transfers
- This has been agreed as preferable or more efficient than selling assets to raise cash
Tax efficiencies could be an advantage of a MVL regarding dividend in specie payments, but this cannot be the sole purpose of winding up the business – HMRC will investigate if it is.
It’s also worth noting that if any company debts are still outstanding after 12 months from the MVL, failing to prove that this was unexpected may result in a fine or imprisonment.
Summary: what is a dividend in specie?
In short, you may be aware that a distribution in specie is the transfer of assets as they are. A dividend in specie is similar, but the difference is that the assets have been previously declared as cash.
Cash-poor but asset-rich companies may consider a payouts during a MVL via dividend in specie, meaning that shareholders receive assets instead of cash.
For more information about a MVL or dividend in specie settlement, please contact us.
