Before authorising dividends, directors of Jersey companies must meet specific legal duties and make a solvency statement under the Companies (Jersey) Law 1991. Getting this wrong exposes you personally to liability and can result in the dividend being reversed. I’ve seen too many well-intentioned directors overlook this requirement, often because they’ve grown the business without formal governance structures in place. The good news is that compliance is straightforward once you understand what is required.
What Counts as a Distribution?
Under Article 114 of the Companies (Jersey) Law 1991, a distribution is every description of distribution of the company’s assets to its members as members, whether in cash or otherwise. This includes the obvious (cash dividends) but excludes, among other things, redemptions or purchases of the company’s own shares, certain reductions of capital, and distributions of assets on a winding up. If value is leaving the company and going to shareholders, it’s likely a distribution under Jersey law.
The Solvency Statement: What the Law Requires
Directors must make a formal solvency statement before any distribution that reduces the company’s net assets or relates to shares recognised as a liability is authorised. Under Article 115 of the Companies (Jersey) Law 1991, this is not optional where those conditions apply.
The statement must reflect a genuine belief, based on reasonable grounds, that the company can pay all liabilities as they fall due both immediately after the distribution and for the 12 months following or until the company is dissolved, whichever occurs first. If a solvent winding up is planned, the focus is on the period until dissolution rather than a full 12 months, but you need to be clear about that.
All directors who are to authorise the distribution must support the statement. You can’t rubber-stamp a distribution if you haven’t satisfied yourself with the company’s financial position. That said, if you have proper financial information and forecasts in front of you, and the company’s position is sound, the statement is straightforward to make.
What Makes a Valid Solvency Statement?
Your statement should be grounded in actual financial data. At minimum, you need current and forecasted cashflows. If the company is seasonal, has lumpy customer contracts, or faces known upcoming costs, those factors need to be reflected in your analysis. Tax bills, staff bonuses, lease obligations, loan repayments: these all matter to the solvency assessment.
The supporting documentation should be retained. Financial statements, management accounts, updated cashflow forecasts, and any board papers discussing the distribution serve as evidence that you made an informed decision. If the distribution is material, or if the company’s finances are tight, getting a brief note from your accountant or legal adviser is sensible and reinforces the decision-making process.
Crucially, the solvency statement itself should be recorded either as a separate, signed document or properly embedded in the board minute or resolution that approves the distribution. Attaching it to the exact minute matters. If you approve the dividend in March but date the solvency statement in April, or vice versa, that gap creates ambiguity about when the assessment was made.
Conflict of Interest and Record-Keeping
If any director has a material interest in the distribution (for example, because they’re a significant shareholder), that conflict should be disclosed and recorded. It doesn’t prevent distribution, but it needs to be transparent.
Keep the board papers and financial information you rely on. If the company is later challenged by a creditor or if there’s a question about the director’s conduct, your contemporaneous records demonstrate that the decision was made with proper care and on the basis of reasonable information.
Why This Matters for Your Protection
Making a distribution that is caught by Article 115 without the required solvency statement is unlawful. If an unlawful distribution is made and the statutory conditions are met, the shareholder who received it can be required to repay it to the company, and the position of the directors may be scrutinised in any subsequent creditor challenge or insolvency process. The dividend itself can be reversed, which creates cash flow problems for shareholders and reputational damage for the company.
More positively, a properly made solvency statement protects you. It demonstrates that you’ve discharged your duties as a director with due care and attention. It also signals to third parties, including potential acquirers or lenders, that the company has proper governance in place. When the company is acquired or restructured, clean dividend records matter. Buyers’ legal advisers routinely scrutinise dividend history, and any irregularities can delay transactions or affect valuation.
The compliance burden is minimal relative to the protection it provides. A good accountant or legal adviser can help you establish a simple template that you’ll use each time. Once it’s embedded in your process, it becomes routine.
Getting help
Before approving a dividend, directors should be satisfied that the legal requirements have been met and that the decision is properly supported and recorded. Parslows Corporate & Commercial Legal Services can advise on solvency statements, board resolutions, director duties and the supporting documentation needed to protect both the company and its directors. Contact our team for clear, practical advice before making a distribution.