If a firm has overdue liabilities or is legally insolvent or bankrupt, most states prohibit its payment of cash dividends.

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If a firm is facing financial difficulties such as overdue liabilities, insolvency, or bankruptcy, it may not be able to meet its obligations and pay its creditors. In such cases, payment of cash dividends would deprive creditors of the funds they could use to recover their debt. Therefore, many states prohibit companies that are legally insolvent or bankrupt from paying dividends until their financial situation improves.

If a Firm Has Overdue Liabilities or Is Legally Insolvent