This article has been written by Anlyn E S a student of Government Law College, Thrissur
The share of profit which falls to each member of the company is known is Dividend. Dividend is the share of company’s profit distributed among the members. [Barjor Hoshangi Vakil v. Mettur Chemical & Industrial Corpn. Ltd (1963)]. In the hands of the recipient, it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. [Kent Waterworks v. Lamplough (1904) AC 27]. Section 2(14A), added by the Companies (Amendment) Act, 2000, defines ‘dividend’ to include any ‘interim dividend’. In Commissioner of Income-tax v. Gridhardas & Co. (Pvt).) Ltd. (1967), Supreme Court defined the expression ‘dividend’ as follows: “as applied to a company which is going concern, it ordinarily means the portion of the profits of the company which is allocated to the holders of shares in the company”. “In the case of winding up, it means a division of the realized assets among creditors and contributories according to their respective rights”.
Payment of Dividend
The payment of dividend is bound by two important principles. They are as follows: –
- Dividends must never be paid out of capital
- Dividends shall be paid only out of profits
Section 123 of the 2013 Companies Act allows dividends to be paid out of the following source:
- Profits of the company for the year for which dividends are to be paid:
Dividends may be out of the profits of the company for the current year after providing for depreciation. However, the Central Government may, if it thinks necessary to do so in public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year, or any previous financial year or years without providing for depreciation.
- Undistributed profits of the previous financial years
Dividends may be declared out of profits of the company for any previous financial year or years arrived at after providing for depreciation. However, the Central Government may, if it thinks necessary to do so in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year, or any previous financial year or years without provide for depreciation.
- Moneys provided by the central or state government.
A company can also declare dividends out of the money provided by the central government or a state government for payment of such dividend in pursuance of a guarantee given by that Government.
Payment of dividends out of capital is a breach of trust and the company may require the directors to replace the capital. [ K. Madhava Nayak v. Popular Bank Ltd, (1969) 39 Comp. Cas 717: AIR 1970 Ker 131]. In the famous Flitcroft case Jessel MR said: “the creditor has no debtor but that impalpable thing that corporation, which has no property except the assets of the business. The creditor, therefore, gives credit to that capital, gives credit to the company on the faith of the representation of that capital shall be applied only for the purposes of the business and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders….”
The CJ of the Madras High Court, Ramachandra Ayyar, observed that “section 205 (1956 Act) of the Act only prescribes that the dividend shall be paid out of profits of the company. It does not say further how those profits have to be ascertained. Profits of a year under the mercantile system of accounting only means the excess of receipts for the year over expenses and outgoings during the same year. It is not necessary that such excess should be in the form of cash in the till of the company. It will be open to a company to declare a dividend on the basis of its accounts…where it is based on the estimated profit, which had not actually come in the form of cash to the company; it will be open to it to pay such dividends from out of other cash in their hands or perhaps even to borrow and pay them off. That will not amount to paying dividend out of capital”. Neither the courts thought it fit to formulate any rigid rules. Thus “dividend fund” is a fluid concept. The first concern of the courts has been that the capital is maintained in the form of assets if it is not equal to the paid-up capital at least sufficient to go round the creditors. [ Verner v. General & Commercial Investment Trust Co, (1894) 2 Ch 239].
There was no statutory provision, before the Companies Amendment 2000, relating to ‘Interim Dividend’. It can be declared by the directors by passing a Board Resolution. Sanction of the general meeting of shareholders is not required for this purpose. Since the directors are held liable if interim dividend is paid and there is no profit at the end of the year, resulting in dividend being paid out of capital, the Board should be careful in declaring such dividend. The Borad should not declare interim dividend unless substantial profits have been made during the first half of the year and similar profits are expected during the second half of the year. To avoid these issues Equalization fund or reserve is created.
Procedure for Payment
A company which is declaring the ‘interim dividend’ should follow these steps:
- Verification of declaration of the interim dividend by the Board of directors.
- Confirm whether the profits for the part of the financial year up to the time of proposed declaration are sufficient to justify payment of interim dividend.
- Intimate stock exchange(s) about Board Meeting to consider the payment of interim dividend.
- Resolution of the Board of Directors should state the rate of interim dividend in a separate account within 5 days from the date of declaration.
- Inform stock exchange of the date pf closure of register of members.
- At least seven days before the closure of the register of members or the record date fixed publish a notice in this regard in a newspaper circulating in the district in which the registered office of the company is situated.
- Open a separate ‘Interim Dividend Account’
- Post Dividend Warrants within 30 days from the declaration of the interim dividend.
- Dividend Warrants to non-resident shareholders should be posted after securing necessary permission of the Reserve Bank.
The Articles of most of the companies empower the Board of Directors to allocate the profit to different reserves when annual accounts are prepared and also to determine the rate of dividend and recommend in general meeting for formal declaration. The decision of the board on the rate is final. The general meeting cannot compel the Board to declare dividends. Nor can the members compel the Board to increase the recommended by the Board whether the whole, or a portion shall be divided among the shareholders are questions of internal management of the company and the court has no jurisdiction to interfere.
In case of preference shares the Articles authorize the directors to declare a final dividend on them. When a final dividend is declared interim dividend is not adjusted unless the resolution specifically provides that the final dividend includes the interim dividend.
1.Company Law, A. Ramaiya
2.Company Law, N. C. Jain
3.Company Law, Avatar Singh
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