Could a solvency-based dividend regime transform UK group reorganisations?

Among the many proposals being considered is a potentially fundamental reform to the UK's capital maintenance regime: replacing the existing distributable profits test for dividends with a solvency-based model.

While the proposal has obvious implications for dividend policy, its impact could extend much further. For organisations undertaking corporate simplification projects, internal restructurings and wider group reorganisations, the change could alter how transactions are designed and executed.

Group reorganisations arise across organisations of all sizes and sectors. The proposals may be particularly relevant to groups that regularly acquire or divest businesses, where pre-acquisition and post-acquisition reorganisations are often required to prepare a group for a transaction, integrate an acquired business or simplify the resulting structure.

Why distributable reserves matter beyond dividends

Distributable reserves are often viewed as a dividend issue. In reality, they frequently become a central workstream in group reorganisation projects.

Many reorganisations involve a sequence of interconnected steps, some of which are undertaken not because they are commercially desirable in their own right, but because they create distributable reserves required to facilitate subsequent transactions. The ability to upstream value, eliminate or move entities, forgive intercompany debts or implement broader simplification strategies can depend on the availability of distributable profits at key points within the group structure.

As a result, significant time is often spent analysing historic transactions, assessing realised profits and losses, and considering the accounting consequences of events that may have occurred many years earlier.

This complexity largely stems from the existing framework. The Companies Act 2006 permits distributions only from accumulated realised profits less accumulated realised losses. In practice, however, companies frequently rely on extensive technical guidance and detailed accounting analysis when assessing the amount available for distribution.

The Government's proposal

Under the proposed model, the legality of a dividend would be determined by solvency rather than distributable reserves. The consultation suggests a framework under which directors would state that the payment of a dividend would not affect the company's ability to continue as a going concern.

If adopted, this would represent one of the most significant changes to UK dividend law in decades.

Could group reorganisations become simpler?

At first sight, many groups undertaking restructuring activity may welcome the proposal.

Removing the need to calculate distributable reserves could eliminate a significant amount of technical analysis. It may reduce reliance on detailed assessments of historic accounting entries and lessen the need for steps whose primary purpose is to create distributable reserves.

For some groups, this could make reorganisations quicker, more efficient and easier to execute.

However, it is not obvious that complexity disappears altogether.

The current regime focuses largely on analysing the past, whereas a solvency-based model would place far greater emphasis on the future. In practice, requiring directors to state that the payment of a dividend would not affect the company’s ability to continue as a going concern could involve greater consideration of matters such as forecast cash flows, upcoming liabilities, financing arrangements and contingent liabilities. This may present greater challenges for smaller companies that do not routinely prepare detailed forecast information.

There is also a practical question around how a solvency-based regime would operate in the context of complex multi-step reorganisations.

Many group simplification projects are not implemented through a single transaction. Instead, they frequently involve a sequence of interdependent steps, each of which changes the balance sheet position of one or more entities within the group. Transactions may also be completed in stages over an extended period rather than simultaneously.

Under the current framework, the distributable reserves position can be assessed at the point a distribution is proposed. Under a solvency-based regime, it is less clear whether a single solvency assessment would be expected to cover an entire reorganisation programme or whether directors would need to revisit the analysis as individual steps are implemented and financial positions evolve.

In practice, a potential requirement for multiple solvency assessments throughout a reorganisation, where the reorganisation is undertaken over an extended period of time, could reduce some of the simplification benefits that the proposed regime seeks to achieve. Relying on a single assessment at the outset of a lengthy or evolving restructuring programme may prove challenging where the financial position of the relevant entities changes as the project progresses.

For groups undertaking complex reorganisations, the degree of flexibility and certainty provided by any future solvency regime may ultimately prove just as important as the move away from distributable reserve calculations itself.

There is also a wider question of certainty. While the current distributable profits framework is complex, it is supported by established guidance, case law and a broadly understood methodology. A solvency assessment would be more judgemental and forward-looking, potentially giving creditors less visibility over how the conclusion was reached. For groups undertaking complex reorganisations, any future regime will therefore need to balance flexibility with sufficient consistency and creditor protection.

The key question may therefore be whether the proposal removes complexity or simply shifts it from accounting analysis to solvency assessment.

Looking ahead

For organisations undertaking group reorganisations, the proposal is about more than dividend policy. If implemented, it could reshape how group reorganisations are planned and executed, reducing the need for steps designed solely to create distributable reserves while placing greater emphasis on forward-looking solvency assessments and director judgement.

The practical detail will therefore be critical, particularly for complex, multi-step reorganisations and groups that undertake them regularly.

The consultation remains open until 30 November 2026 and seeks views on whether the UK should move to a solvency model for determining the legality of dividends and, if so, the key features that should form part of that regime, together with any further proposals the Government should consider. Organisations that frequently undertake group reorganisations may wish to consider whether the proposed model would deliver genuine simplification in practice and what safeguards or guidance would be needed to make it workable across evolving, multi-step transactions.