Client Profile
Business: Small family-owned services company (SME) based in Jersey
Structure: Private company limited by shares, two owner-directors
Objective: Declare a £75,000 dividend following a profitable year, without jeopardising cash flow or breaching legal requirements.
The Situation
After a strong trading year, the owner-directors wanted to reward themselves and signal confidence to their small group of investors. The latest management accounts showed positive net assets and a healthy profit on paper. The directors initially assumed that a dividend was a straightforward decision.
What we spotted immediately told a different story. A large supplier invoice and a quarterly tax payment were due within eight weeks. Several customers paid on extended terms, creating a temporary cash-flow gap. The company had no formal dividend policy and a history of minimal board documentation, short minutes, and limited solvency analysis.
This is where most owner-directors stumble. They conflate accounting profit with distributable cash. It’s a natural mistake, but it can expose you to real legal risk.
Why this matters legally
Under Jersey company law, a company can generally make distributions, including dividends, from a wide range of sources, provided the board can genuinely demonstrate solvency. In practice, this means directors must be able to show that the company can discharge its liabilities as they fall due immediately after the distribution and for the next 12 months.
Good governance also expects clear minutes evidencing the information reviewed, risks debated, conflicts handled, and the rationale for the decision. These are not admin “nice-to-haves”. They are essential protections.
The critical point that catches many owner-directors off guard: positive net assets do not equal cash solvency. If a dividend undermines short-term liabilities, directors may face unlawful distribution risk and potential personal exposure.
Our approach
We advised on a three-step governance and financial approach tailored to SMEs, keeping the process fast and pragmatic.
Step A: Rapid Cash-Flow Stress Test
We built, with the assistance of their accountant, a 14-week rolling cash-flow with three scenarios: base, downside (late receipts), and severe-downside (late receipts plus unexpected expense). We incorporated tax dates, supplier due dates, payroll, and GST where relevant. The key was mapping customer payment behaviours to actual receipt patterns, not contractual terms. Customers always pay later than their invoices suggest.
Step B: Solvency Paper and Board Minute Draft
We prepared a short solvency note setting out assumptions, key risks, and liquidity buffers. This is where you capture conflicts, such as both directors benefiting from the dividend, and how they would be managed. Full disclosure. Decision made strictly in the company’s interests. We also included a risk appendix summarising alternatives considered (smaller dividend, staged payout, deferral) and why the chosen route best balanced reward and prudence.
Step C: Policy and Process “Hygiene”
We drafted a simple Dividend Policy setting out when the board will consider distributions, minimum liquidity ratio, and documentation standards. We updated the Minute Template so that future decisions embedded the decision journey, evidence reviewed, solvency statement wording, and follow-up actions.
The decision recommended
Instead of paying the full £75,000 immediately, we recommended a phased approach:
£50,000 now, aligned to current cash balances and confirmed inflows.
£25,000 next quarter, conditional on two triggers: supplier and tax obligations met on time, and DSO (days-sales-outstanding) within target range or alternative financing available.
Board minutes were drafted embedding a solvency statement and recorded the financial packs used (forecasts, sensitivity runs), the risks discussed (late receipts, potential equipment failure), conflict disclosures (owner-directors as beneficiaries), and the corporate-benefit rationale (maintaining morale, signalling confidence, preserving operational resilience). We also pre-approved contingency actions: a temporary overdraft line and paused discretionary capex until quarter-close.
Outcomes
The first £50,000 dividend was declared and paid lawfully. Liquidity remained above the board-set minimum buffer of 5 weeks’ operating cash.
At the quarter checkpoint, supplier and tax obligations had been met on time. Receivables improved by 12 per cent and DSO narrowed by 8 days. The second £25,000 tranche was authorised with updated minutes and solvency paper.
Longer term, the company introduced a standing Dividend Policy and board pack discipline. This reduced internal friction. The directors now had a repeatable framework for future payouts. The relationship with the company’s accountant and bank improved visibly. Visibility and prudence matter to lenders.
What “good” looked like in the board minute
Here is an excerpt from their minute, basic style but complete:
“The Board reviewed the 14-week cash-flow forecast and sensitivity analyses. The Board noted upcoming supplier obligations and tax instalments.
Conflicts: both directors disclosed their interest in the proposed dividend. The Board confirmed decisions would be made solely in the company’s interests.
Solvency statement: The directors formed the opinion that immediately following the distribution and having regard to the company’s prospects, intended management actions, and available financial resources, the company would be able to discharge its liabilities as they fall due and continue to carry on business for the ensuing 12 months.
The Board approved a £50,000 distribution today and resolved to consider a further £25,000 at quarter-end subject to the triggers recorded in Annex A.”
This is the language courts and auditors expect. It demonstrates that you thought about solvency, not just profit.
Lessons for Jersey owner-directors
Measure cash, not just profit. Embed a simple weekly cash-flow model and protect liquidity buffers. Your accountant can help you build this in under an hour.
Minutes are your friend. Record the journey. Evidence reviewed, risks debated, conflicts disclosed, rationale documented. If something goes wrong later, your minute is your defence.
Use phased payouts. Staged dividends can align reward with risk management. It also gives you a checkpoint to reassess before committing the second tranche.
Pre-approve contingencies. Agree temporary facilities or cost controls before distribution. It removes friction when decisions need to be made quickly.
Adopt a policy. A short Dividend Policy creates consistency and credibility with auditors, banks, and investors. It also removes emotion from the decision next time.
The difference between a risky dividend and a safe one is not usually about the amount. It is about documenting that you thought about it properly, that you knew the cash position, and that you made a conscious choice with your eyes open.