Declaration and Payment of Dividend – CA Inter Law Notes

Declaration and Payment of Dividend – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Declaration and Payment of Dividend – CA Inter Law Notes

Divisible Profits And Dividends
Meaning of Dividend

• The word ‘dividend’ has origin from the Latin word ‘dividendum’. It means a thing to be divided.
• Ordinary meaning of dividend is a share of profits, whether at a fixed rate or otherwise, allocated to holders of shares in a company. – Chelsea Waterworks vs. Metropolitan Water Board.
• Dividend is a return on investment made in the risk capital of a company, as distinct from interest of deposits, loans and debentures.
• Capitalisation of profits in the form of bonus shares is not dividend.

Definition of Dividend – Section 2(35)

• Section 2(35) of Companies Act, 2013 states dividend includes any interim dividend.
• Definition of dividend is inclusive and it does not clarify what is dividend.

Meaning of Divisible Profit

• All profits available to company cannot be distributed to shareholders as dividend.
• The portion of profit, which can legally be distributed to the shareholders of the company by way of dividend, is called the ‘divisible profit’.

Types of Dividend
Following are two types of dividend:

• Final dividend
• Interim dividend

Comparison Of Dividend
Comparison Between Interim Dividend & Final Dividend

Interim Dividend	Final Dividend
It is declared in between two Annual General Meetings.	It is declared at the Annual General Meeting.
It is declared by Board of Directors at Board Meeting.	It is recommended by Board of Directors but approved by shareholders at AGM.
Board must state in Directors’ Report the amount of interim dividend paid during the year under review.	Board must state in the Di­rectors’ Report the amount of dividend, if any, which it recommends to be paid.

Comparison Between Dividend & Interest

Dividend	Interest
It is paid on equity or prefer­ence shares.	It is paid on debenture or loan.
It is not debt until it is declared.	It is debt like any other debt.
Generally, dividend cannot be paid if company has no profit. Dividend is appropriation of profits.	It is charged against profit.
Generally, rate of dividend is varying.	It is paid at fixed rate.
It is paid, if it is authorised by Articles of company. – Section 51	No authority is needed in Articles of company to pay interest.

Sources For Payment Of Dividend – Section 123
Sources for Payment of Dividend

• A dividend on equity as well as preference shares can be paid only out of profits.
• Dividend can be paid out of :
  • Profits of current year after providing for depreciation as per Schedule II.
  • Accumulated profits of previous years after providing for depreciation for previous years.
  • Profit of current year and undistributed profit of past year.
  • Money provided by State or Central Government, if any in pursuant of guarantee given by Government.

Important Note:

• While computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of liability on measurement of the asset or the liability at fair value shall be excluded.
• Company cannot declare divided without providing depreciation as per Schedule II.
• Company may transfer any percentage of profit to reserve before declaring dividend.

Payment of Dividend not Allowed

• If a company fails to comply with the provisions of sections 73 and 74 with regard to acceptance of deposits from public, it shall not declare any dividend on its equity shares till such non-compliance exists.
• Company cannot declare dividend unless carried over previous losses and depreciation not provided in previous year(s) are set off against profit of current year. – Companies (Amendment) Act, 2015

Dividend Out of Free Reserves- Section 123
When Company can Declare Di-vided out of free Reserves?

• Company can declare dividend out of reserves when company has inadequate profit or has no profit at all to declare dividend.
• If company wants to declare dividend out of free reserves, it shall comply with Rule 3 of Companies (Declaration of Dividend) Rules, 2014.

Rule 3 of Companies (Declaration of Dividend) Rules, 2014
As per Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014 dividend can be declared out of free reserves on following conditions:

• Rate of dividend cannot be more than average of rates at which dividend were announced in previous 3 years. However, this rule is not applicable to company, which has not declared any divided in each of the 3 preceding years.
• Total amount drawn from reserves shall not exceed an amount equal to 1/10th of the sum of its paid up capital and free reserves as per last audited financial statement.
• The amount drawn from reserves shall be first utilized to set off losses incurred in the current financial year and then, surplus, if any, can be utilized towards declaration of dividend.

Payment of Dividend Out of Capital Profits

• There is no specific provisions whether ‘profit’ is only revenue profit or capital profits.
• In absence of any such distinction in the Act, capital profits should be eligible for distribution, if it is actually realised.
• Capital profits, ie. profits gained by sale of capital assets can be utilized for distribution of dividend, only on following conditions :
  • Capital profit should be actually realized.
  • Articles of company should permit such distribution.
  • The surplus should remain after valuation of whole of the assets and liabilities.
• Thus, dividend cannot be paid by revaluation of assets, as the surplus has not been actually realised.

Sources or Examples of Capital Profit
Capital profit may arise from the following sources:

• Profit on sale of fixed assets.
• Profit on revaluation of fixed assets.
• Profit on reissue of forfeited shares.
• Premium on issue of shares or debenture.

Declaration And Payment Of Dividend
Who can Declare Dividend?
Interim Dividend
Interim dividend can be declared by Board.

Final Dividend
Final dividend is recommended by Board and approved by members at General Meeting.

Time for Payment
Dividend (Interim or final) must be paid or dividend warrants must be posted within 30 days from declaration of dividend.

Method of Payment

• Dividend must be paid by any of following mode :
  • Cash
  • Cheque
  • Dividend warrant
  • Credit in bank account of shareholder
  • Electronic mode (ECS)
• Dividend cannot be paid in ‘kind’ e.g. in form of gifts, goods or bonus shares.
• In case of joint shareholders, dividend can be paid to person whose name is registered first.
• Payment of dividend is made to another person, if directed by shareholder or joint shareholders in writing.
• Section 123 of Companies Act, 2013 states that dividend shall be paid only to the registered shareholder or to his order or to his bankers.
• Dividend can be paid to transferee, if the registered holder of shares authorizes company in writing to pay the dividend to transferee.
• In case of share warrant, dividend can be paid to bearer of the share warrant or his bankers.
• If the shares are held in demat, dividend is paid to the beneficiary whose names are provided by CDSL or NSDL to the company.

Important Note:

• In the case of Nidhi Company, any dividend payable in cash may be paid by crediting the same to the account of the member, if the dividend is not claimed within 30 days from the date of declaration of the dividend.
• Notice of dividend declared shall be given to the persons entitled to share in it, in manner specified in Act. – Regulation 87 of Table F.

Round off
Dividend to be rounded off to nearest rupees.

Dividend on Pro rata basis – Section 51

• Dividend can be paid on pro rata basis.
• It means, dividend is payable only on paid up portion of shares.
• In case of new shares issued during the year, offer document may provide that dividend is payable on pro rata basis from the date of allotment.
• Thus, old shares will be entitled for dividend for full year, while new shares will be entitled to dividend only from date of allotment on pro rata basis.
• Dividend is not payable on call money paid in advance. – Regulation 83 of Table F
• If shares with differential rights have been issued, dividend will be declared and paid on the basis of terms of issue. – Regulation 83 of Table F

Transfer to Separate Bank Account

• As soon as dividend is declared, the amount of dividend (Final dividend or Interim dividend as the case may be) shall be deposited in a separate bank account within 5 days from date of declaration of dividend. Section 123(4). However, this provision is not applicable to 100% Government Company.
• The amount deposited will be used for payment of dividend.

Interim Dividend
What is Interim Dividend?

• As per section 2(35) of Companies Act, 2013, dividend includes interim dividend.
• Interim dividend is usually paid in the middle of the year.
• It can also be said that interim dividend is paid between two AGMs.

Optional

• Payment of interim dividend is optional.
• If Board of directors find that profitability of the company is good and is likely to be maintained for balance part of the year.

Interim Dividend out of Profit

• Interim dividend shall be declared by considering profits generated during financial year till the quarter preceding the date of declaration of interim dividend.
• During closure of financial year to date of AGM, interim dividend can be declared for previous financial year by considering profit of previous financial year.
• When the company has incurred any loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

Who can Declare?

• As per Regulation 81, Table ‘F’ Board shall declare interim dividend.
• Even if Articles of company do not contain provision of declaring interim dividend, Board can declare interim dividend as it is authorised by Companies Act, 2013.

No Further Approval
If interim dividend is ‘declared’ by Board, its approval or confirmation in the General Meeting is not required.

Cancellation Of Dividend
Usually Dividend not Revoked

• Dividend declared in the General Meeting is a debt payable by the company to its registered shareholders – Hanuman Prasad Gupta vs. Hiralal.
• Thus, once a dividend is declared, it cannot be revoked by Board of directors in ordinary circumstances.

When Dividend Cancelled?

• However, dividend may be revoked in the General Meeting for just and proper reasons.
• If a dividend declared in the General Meeting is against provision of Act, it can be revoked.

Provisions Apply to Interim Dividend
Since as per section 2(35), dividend includes interim dividend, the provision applies to interim dividend also.

Right to Dividend, Rights Shares And Bonus Shares To Be Held In Abeyance Pending Registration of Transfer Of Shares – Section 126

Right to Dividend, Bonus Shares during Transfer

• When instrument of transfer of shares has been delivered to company for registration and the transfer of such shares has not been registered by the company, it shall:
• transfer the dividend for shares specified under transfer deed to the Unpaid Dividend Account referred to in section 124 unless the company is authorised by the registered holder in writing to pay such dividend to the transferee; and
• keep in abeyance, any offer of rights shares and any bonus shares

Failure To Pay Dividend Within 30 Days – Section
Basic Provision
Company shall pay divided or dispatch dividend warrant within 30 days of its declaration.

Default Company
If dividend is not paid within 30 days or dividend warrant is not posted within 30 days, the company is liable to pay simple interest @ 18% p.a. during the period default continues.

Director

• Every director is liable for imprisonment up to 3 years.
• He is liable if he has committed it knowingly.
• In addition, he is liable to pay fine of ₹ 1,000 per day till time default continue.

When Non-payment is not Default?
In the following cases, non-payment of dividend will be permitted, ie. it will not be treated as offence :

• Where dividend could not be paid by operation of any law. (For example: restrictions under FEMA)
• Where directions given by shareholder for payment of dividend cannot be complied with and same has communicated to him.
• Where there is dispute regarding right to receive dividend.
• Where the dividend has been lawfully adjusted by the company against any sum due to the company from the shareholder.
• Where failure to pay the dividend or post dividend warrant was not due to any default on part of the company.

Nidhi Company
In the case of Nidhi Company, section 127 is applicable subject to the modification that where the dividend payable to a member is ₹ 100 or less, it shall be sufficient compliance of this section, if the declaration of dividend is announced in the local language newspaper of wide circulation and announcement of the said declaration is also displayed on the notice board of the Nidhi for at least 3 months. (MCA notification dated 5-6-2015)

Who can File Complaint?

• A shareholder can file complaint, if company has not paid dividend or not dispatched dividend warrant within 3 0 days from declaration.
• In V. Karthikeyan vs. ROC, it was held that ROC is an aggrieved party and can lodge complaint under section 127.

Dividend On Preference Shares
Preferential Right of Dividend

• Preference shares can carry dividend of a fixed amount, before any dividend is paid on the equity shares.
• A preference share carries a preferential right as to dividend. Preferential right to dividend is subject to:
  • The term of issue; and
  • The Articles of Association.

When Preference Share holder get Dividend?
Dividend on preference shares can be paid if:

• It is declared
• Company has earned sufficient profits
• It is declared as per provisions of Act and Articles of Association

Other Provisions

• Dividend on preference shares can be paid either for fixed amount or an amount calculated at a fixed rate.
• If there are two or more classes of preference shares, the shareholders of the class which has priority are similarly entitled to their preferential dividend before any dividend is paid in respect of the other class.
• Preference shareholders cannot consider the preference dividend as a debt and sue for its payment unless it is declared.

Unpaid Dividend – Section 124
Unpaid Dividend Account
Transfer to separate account

• Dividend warrants are posted to last known addresses of shareholders.
• If dividend is not paid or not claimed within 30 days from date of declaration, the company must transfer the unclaimed amount to a separate account titled ‘Unpaid Dividend Account of Company Limited or Private Limited’ within 7 days from expiry of 30 days.
• It is clarified that ‘dividend which remains unpaid’ includes dividend warrants, which are dispatched but not encashed by the shareholders.
• The unclaimed dividend amount should be retained in the separate account for 7 years.
• If dividend is claimed within 7 years, the amount can be paid out of such separate account.

Important Note:
Provision of transfer of dividend to separate account is not applicable to 100 % Government Company.

Reporting/Statement:

• Company should prepare statement con-taining names of shareholders, their last known addresses and unpaid dividend amount within 90 days from transfer of any amount to unpaid dividend account.
• Statement is uploaded on website of company and website specified by Central Government for this purpose. Company is required to file Form IEPF- 2.

Penalty

• Interest at rate of 12% p.a. is payable if unpaid amount of dividend is not trans¬ferred to the separate account within stipulated time.
• Every officer in default is liable to pay fine upto ₹ 5 lakhs (minimum one lakh)

Transfer to IEPF Account

• If dividend is not claimed within 7 years from date when dividend became due, the unclaimed or unpaid amount should be paid to Government in ‘Investor Education and Protection Fund’ (IEPF).
• Details are submitted to authority in Form IEPF-1.

Transfer of Shares

• Now, company is required to transfer the shares to IEPF Authority (fund) for which dividend has remained unpaid or unclaimed for consecutive 7 years.
• In case the beneficial owner has encashed any dividend warrant during the last 7 years, such shares shall not be required to be transferred to the fund even though some dividend warrants may not have been encashed.
• As per Rule 6 of IEPF Rules, 2016, shares shall be transferred to an IEPF DEMAT Account. It should be transferred within period of 30 days after expiry of 7 years. To transfer shares to IEPF DEMAT Account, Board of director shall authorise the Company Secretary or any other person to sign the necessary documents.
• Company should inform to the concerned shareholders whose shares are due for transfer to IEPF Authority three months before due date of transfer of shares. Notice to this effect shall be published in one English and regional daily newspaper. It is also uploaded on website of company.
• However, shares are not required to transfer as above, if Court or Authority has issued restraining order. Details of such shares are required to be given to authority in Form IEPF 3 within 30 days from end of financial year.
• Company shall send statement in Form IEPF-4 containing details of shares transferred to IEPF Authority.
• The company shall maintain the details of shareholding of each individual shareholders whose shares have been credited to the DEMAT account of the Authority.
• The voting rights on shares transferred to the fund shall remain frozen until the rightful owner claims the shares.
• All benefits accruing on such shares e.g., bonus shares, split, consolidation, fraction shares etc., except right issue shall also be credited to such DEMAT Account.
• As per Rule 7 of IEPF Rules, 2016, rightful claimant can claim the transfer of shares from IEPF Authority by making an application.

Investor Education And Protection Fund – Section 125 & Iepf Rules, 2016
Establishment and Purpose of Fund

• Investor Education and Protection is established by Central Government.
• It will be utilized for promotion of investor awareness and protection of investors.

Sources of Fund
The fund will get amounts from following sources:

• Amount of unpaid dividends.
• Application money received by company for allotment of any securities and due for refund.
• Matured but unpaid deposits with companies other than banking companies
• Matured but unpaid debentures with companies
• Interest Dividend
• Interest accrued but unpaid on aforesaid amounts
• Grants and donations from Central Government, State Government, companies or any other institutions.
• Interest or other income received out of the investments from the fund.
• The amount received under disgorgement of securities. [As per section 38(4)]
• Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for 7 years or more.
• Redemption amount of preference shares remaining unpaid or unclaimed for 7 years or more.
• All shares for which dividend has remained unpaid or unclaimed for consecutive 7 years.
• Resultant benefits arising out of shares held by IEPF authority.
• The amounts due for payment by company on account of dividend or refund of application money or debentures repayment or deposits repayment will be kept by company for 7 years.

Utilisation of funds
The fund shall be utilised for:

• Refund of unclaimed dividends, matured deposits, matured debentures, application money due for refund and interest thereon.
• Promotion of investors’ education, awareness and protection.

Lien On Dividend
When Lien on Dividend is Allowed?
A company may have lien on dividend, if provided in Articles. If so, dividend payment can be adjusted against such lien.

Table F

• As per Regulation 84 of Table F, the Board may deduct from any dividend payable to any member all sums of money, if any, presently payable by him to the company on account of calls or otherwise in relation to the shares of company.
• Thus, deduction from dividend is permissible only if there are calls in arrears or some other amount is payable in relation to the shares of the company (and not for any other reason)

Practice Questions

Question 1.
‘No dividend can be recommended by the Board of directors of the company in case the company has incurred losses during the financial year for which dividend is to be recommended’. Comment.
Answer:
Dividend can be declared out of reserve or out of money provided by government.

Question 2.
Anmol Ltd. Has incurred a loss of ₹ 16 Cr. During the financial year ended 31st March, 2008. The company had been declaring dividend regularly since last 15 years and had accumulated undistributed profits of ₹ 150 Cr. During last five financial years, the company declared dividend on equity share capital of ₹ 50 Cr at the rate of 20%, 25%, 30%, 35%, 40% respectively. The Chairman of the company did not want to break track record of declaration of dividends and wanted to declare dividend @ 40% for the financial year 2007-08 also. Being the Company Secretary of Anmol Ltd., what would be your advice to the Board of directors of the company?
Answer:
Company can declare dividend out of reserve. Company has incurred loss but it has undistributed profit ₹ 150 Crores. To declare divided out of reserve, company should comply with rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014.

Condition no. 1 – Last 3 years dividend declared by company is 30%, 35% and 40%. Average dividend rate is 35%. Company can declare maximum dividend at rate of last 3 years average dividend declared.
Condition no. 2 – Company can withdraw maximum 1/10th of total of accumulated profit and paid up capital. Here, it is ₹ 20 Crores. (150 accumulated profit + 50 Paid up capital)
Condition no. 3 – The company has incurred loss of ₹ 16 Crores during the year. This amount should be deducted from ₹ 20 Crores. Thus, company has balance of ₹ 4 Crores to declare dividend (i.e., 8%)
Condition no. 4 – After withdrawal of ₹ 20 Crores from reserve, company shall have balance reserve of ₹ 130 Crores, which is more than 15% of paid up capital of company.

Question 3.
The Board of directors of Vir Ltd. declared an interim dividend for the second time during the financial year 2012-13. After declaration, the Board of directors decided to revoke the second interim dividend as they noticed that the company’s financial position did not permit to declare second interim dividend. The Board of directors seeks your advice in the matter. As the secretary of the company, advice the Board.
Answer:
Ordinarily a dividend once declared cannot be revoked except with permission of the shareholders because dividend declared becomes debt to the shareholders. But where a dividend has been declared illegally as in this case, the Board of directors will be justified in revoking the declaration of dividend. Provisions of final dividend are similarly applicable to interim dividend too.

Question 4.
Every company is required to follow useful life of assets as mentioned in Schedule II of the Companies Act, 2013. Is it possible to adopt different useful life of assets other than mentioned in schedule II of the Companies Act, 2013? Comment.
Answer:
Useful life of an asset shall not be ordinarily different from what is specified under Schedule II and residual value of an asset shall not be more than 5% of original cost of the asset. However, company may adopt different useful life from what is specified under Schedule II or company uses different residual value than 5%, then such disclosure shall be given in financial statement.

Question 5.
Under section 123 of Companies Act, 2013, depreciation will have to be provided for working out distributable profit. Though, the present value of land of a company, dealing with land, is much less than the book value, the difference between the book value and market value was not amortized before declaring dividend. Can company declare dividend in this situation?
Answer:
Company cannot declare dividend unless loss on capital is adjusted first and company has profit available from that year.

Question 6.
A resolution was passed by the shareholders in Annual General Meeting approving final dividend @ 20% for the financial year 2007-08 and one month later the Board of directors decided to pay further dividend @ 5% for the financial year 2007-08.
Answer:
If a company has already declared a dividend at a General Meeting, neither the company nor the director can declare a further dividend for the same year.

Question 7.
Whether shareholder can give director to the Company to pay his dividend to any third person?
Answer:
Section 123 provides that dividend shall be paid by a company in respect of any shares therein except to the registered holders of such shares or to his order to any person or to his bankers. Accordingly, it can be suggested that on the direction of the registered shareholder company can pay dividend to any third person.

Question 8.
Whether Company can declare dividend in EGM instead of AGM?
Answer:
As per Regulation 80 of Table F of the Companies Act, 2013 company in General Meeting may declare dividend. As per the Regulation 80 of Table F, it is not mandatory to declare dividend in AGM. If dividend has not declared in AGM then company can declare dividend in subsequent EGM. If dividend is declared in AGM, further dividend cannot be declared at EGM

Question 9.
Whether shares issued during the year are entitled to dividend for full year?
Answer:
In case of new shares issued during the year, offer document may provide that dividend is payable on pro rata basis from the date of allotment or a date specified in offer document. Thus, old shares will be entitled for dividend for full year, while new shares will be entitled to dividend only from the date of allotment on pro rata basis.
It is usually provided that share issued during the year will be entitled to dividend on pro rata basis i.e. only for part of the year for which new shares were held.

Question 10.
What is ‘capital profit’? Can dividend be declared out of capital profit? If so, under what circumstances?
Answer:
The capital profit means profits which arise otherwise than in the normal course of business and earned out of capital transactions.
Combine reading of section 123 of Companies Act, 2013 with leading case of Lubbock vs. British Bank of South America and foster suggest that capital profit is available for distribution of dividend if:

• It is authorised by Articles of company
• Surplus is realised and remains after a valuation of whole of assets and liabilities.

Question 11.
A company declared dividend at an Annual General Meeting for the financial year ended 31 st March, 2014 without providing for depreciation on certain immovable properties on the ground that these assets were acquired investment for the purpose of earning supplementary income, though shown in the Balance Sheet under the head ‘Fixed Assets’ and not for the purpose of any business carried on by the Company. If the company had provided depreciation on the said immovable properties, the company would have suffered loss for the financial year ended 31st March 2014.
Answer the following in the context of the above and with reference to the provisions of the Companies Act, 2013:
(i) Is it in order for the company to declare dividend for the financial year ended 31st March, 2014 without providing for depreciation on certain immovable properties?
(ii) Is it possible for the Board of directors of the company to revoke the dividend which has been declared at the Annual General Meeting?
(iii) Is it possible for the company to claim that depreciation has not been provided in the accounts as the company is not entitled to any depreciation under the Income-tax Act?
Answer:
(i) No
(it) Ordinarily a dividend once declared cannot be revoked except with permission of the shareholders because dividend declared becomes ‘ debt to the shareholders. But where a dividend has been declared
illegally as in this case, the Board of directors will be justified in revoking the declaration of dividend.
(Hi) Company’s contention is not correct.

Question 12.
A company for the financial year 2011-12 declared dividend on 19th September, 2012 but failed to distribute the same within prescribed period. A case was filed against a director in this regard. The director has contended that he had resigned before the declaration of dividend. Decide face of the directors in the light of the relevant provisions of the Companies Act, 2013.
Answer:
Company and persons who are directors at the time of declaration of dividend liable for failure to distribute dividend within period of 30 days. In this case, director had resigned before declaration of dividend by company. He is not liable for default.

Question 13.
In Evergreen Ltd., the Board of directors declared on interim dividend but could not distribute the dividend due to objections of audit committee that the accounts considered by Board were false; and true financial results were inflated by not incorporating outstanding liabilities and over valuation of inventories. A shareholder filed a suit for non-payment of dividend. One of the director contended that he never attended the Board Meeting where the issue relating to payment of dividend was declared on the basis of false accounts. Discuss about the validity of contention of the director.
Answer:
Board of directors can declare interim dividend out of profit available during financial year. When company has incurred any loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shali not be declared at a rate higher than the average dividend declared by the company during the immediately preceding three financial years.

Question 14.
Board of directors of KM Ltd. proposes to transfer 11.33% of the net profits of the company for the financial year 2015 -16 to general reserves. Examining the provisions of the Companies Act, 2013, advise the Board whether it can go ahead with its proposal.
Answer:
Company may transfer any percentage of its net profits for that financial year, as it may consider appropriate to the general reserves of the company. Board should pass board resolution to transfer net profits to general reserve.

Past Examination Questions

Question 1.
Board of directors of M/s. RPP Ltd. in its meeting held on 29th May, 2014 declared an interim dividend payable on paid up Equity Share Capital of the Company. In the Board Meeting scheduled for 10th June, 2014, the Board wants to revoke the said declaration. You are required to state with reference to the provisions of the Companies Act, 2013 whether the Board of directors can do so. (CA June 2009, May 2012)
Answer:
The Board of directors is authorized to declare interim dividend. Amount of interim dividend shall be deposited in a separate bank account within 5 days from the date of declaration of such dividend. The amount deposited shall be used for payment of interim dividend. Board can revoke declared divided only in extraordinary circumstances or where declaration of dividend is void.
In view of the above legal position, the Board of directors of RPP Ltd. must have deposited the amount of interim dividend declared on 29th May, 2014 into a separate bank account on or before 3rd June, 2014 ie. within five days from 29th May, 2014 when the interim dividend was declared. As stated above, the amount once deposited into a separate bank account, can be used only for payment of interim dividend.
Accordingly, the Board of RPP Ltd. cannot revoke the interim dividend declared on 29th May, 2014 and do not have any power to use the interim dividend amount transferred to a separate bank account for any other purpose.
If the Board had not transferred the interim dividend amount to a separate bank account and not paid interim dividend within the required time as per provisions of Companies Act, 2013, the company and its directors are liable to the applicable penal provisions of the Companies Act.

Question 2.
A Public Company has been declaring dividend at the rate of 20% on equity shares during the last 3 years. The Company has not made adequate profits during the year ended 31st March, 2014, but it has got adequate reserves which can be utilized for maintaining the rate of dividend at 20%. Advise the Company as to how it should go about if it wants to declare dividend at the rate of 20% for the year 2013-14. Would your answer be different if the company utilized only the profits made in the previous years and retained in the profit and loss account for the purpose of payment of dividend at the rate of 20% for the year 2013-14? (CA November 2009 Modified)
Or
The agenda for the meeting of the Board of directors of M/s Brilliant Enterprises Ltd. held on 20-5-2014 for adopting the financial statement for the year ended 31-3-2014 included an item relating to payment of dividend. At the meeting it became apparent that the profits made during the year ended 31-3-2014 were inadequate to declare dividend.
The Board was keen to maintain the rate of 20% dividend on the equity shares as declared in the previous years so as to maintain the image of the company. The company has some accumulated profits earned in / previous years, which were transferred to reserves. Advise the company as to how it should go about to achieve the objective to pay dividend at the rate of 20% on the equity shares. (CA May 2011)
Answer:
Company can declare dividend out of profit of current year or profit of any previous year after providing for depreciation. In case of no profit or inadequacy of profit, company can withdraw amount from previous year’s profit (ie. reserve) and use it for payment of dividend.
As per section 123, if in a particular year, profits are not adequate to declare a dividend, dividend can be declared out of reserves, as per Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014.

The conditions prescribed are as follows:

• Rate of dividend cannot be more than average of rates at which dividend were announced in previous 3 years. However, this rule is not applicable to company, which has not declared any divided in each of the 3 preceding years.
• Total amount drawn from reserves shall not exceed an amount equal to 1 / 10th of the sum of its paid up capital and free reserves as per last audited financial statement.
• The amount drawn from reserves shall be first utilized to set off losses incurred in the current financial year and then, surplus, if any, can be utilized towards declaration of dividend.
• Balance after withdrawal in reserve account shall not fall below 15% of paid up capital of the company as per last audited financial statement.
  Here in the given case, company had in past paid 20% dividend. Assuming that other conditions as prescribed under Companies Act, 2013 are compiled by company. It can pay dividend at rate of 20%.

Question 3.
SKD an employee of M/s Moreh Ltd. met with an accident and died. The accident occurred when SKD was on company’s duty. He held one hundred partly paid up shares. Normally, the company has a first and paramount lien on the shares. The Board of directors, however, relaxed the said provision with regard to the hundred shares held by SKD as a goodwill gesture on the part of the company. Is the action of the Company valid? State the reasons. Also state whether the company’s lien can be extended to dividend payable on such shares. (CA November 2009)
Answer:
Lien on shares is permissible only if Articles of company authorise. As per Regulation 9 of Table F of the Companies Act, 2013, the company has lien on share for unpaid call or for any other amount due from shareholder. When the right of lien is exercised by company, shares are not transferred.
The Board of directors may, however, at any time declare any share to
be wholly or in part exempt from the said provision. Hence, the decision of the Board of directors of M/s Moreh Ltd. to relax the provisions of lien in respect of shares held by SKD is in order and valid. Further the company’s lien is extended to all dividends payable on such shares.

Question 4.
X & Co. Ltd. made a loss of X 20 lakhs after providing for depreciation for the year ended 31st March, 2014 and as a result the company was not in a position to declare any dividend for the said year out of profits. However, the Board of directors of the company announced the declaration of dividend of 15% on the equity shares payable out of free reserves. The paid up share capital of the company and its free reserves as on 31st March 2014 are X 2 crores and 10 crores respectively. The average dividend declared by the company in the last three years is 25%. Examine the validity of declaration of dividend. (CA May 2010)
Answer:
As per section 123, if in a particular year, profits are not adequate to declare a dividend, dividend can be declared out of reserves, as per rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014.

The conditions prescribed are as follows:

• Rate of dividend cannot be more than average of rates at which div’ idend were announced in previous 3 years. However, this rule is not applicable to company, which has not declared any divided in each of the 3 preceding years.
• Total amount drawn from reserves shall not exceed an amount equal to 1 /10th of the sum of its paid up capital and free reserves as per last audited financial statement.
• The amount drawn from reserves shall be first utilized to set off losses incurred in the current financial year and then, surplus, if any, can be utilized towards declaration of dividend.
• Balance after withdrawal in reserve account shall not fall below 15% of paid up capital of the company as per last audited financial statement.

Based upon above provisions, we can summarise position hereunder:

• Company require ₹ 30 lakhs to pay dividend at 15% rate.
• In the given case, the rate of dividend announced by Board of directors is 15% while last 3 years average rate of dividend is 25%. Therefore, the company is not in violation of this provision.
• Company can withdraw maximum ₹ 1.2 crores {i.e. 10% of Paid up capital and free reserve) from its reserve to declare dividend.
• After withdrawal, balance in reserve should not fall below than 15% of paid up capital of company (Le. 30 lakhs). Here, after withdrawal balance of reserve would be X 9.70 crores.
  Considering this, X & Co. Ltd. can declare a 15% dividend.

Question 5.
M/s. USA Industries Limited has constituted ‘Investor Education and Protection Fund’ as required under the Companies Act, 2013 but so far no amounts have been deposited into the said account. Explain with , reference to the above said enactment, the amounts payable to the credit of the said account and the period within which the amounts shall be paid. (CA November 2011)
Answer:

Question 6.
The Board of directors of Nimbahera Chemicals Limited propose to transfer more than 10% of the profits of the company to the reserves for the current year. Advise the Board of directors of the said company explaining the relevant provisions of the Companies Act, 2013 and the rules thereunder. (CA November 2012)
Answer:
Board of directors may transfer such percentage of its profit for that financial year as it may consider appropriate to the reserve of company. Accordingly, company may transfer more than 10% of its profit to reserve.

Question 7.
The Annual General Meeting of ABC Limited declared a dividend at the rate of 30% payable on paid up equity share capital of the company as recommended by Board of directors on 30th April, 2013. But the Company was unable to post the dividend warrant to Mr. Ranjan, an equity shareholder of the company, up to 30th June, 2013. Mr. Ranjan filed a suit against the company for the payment of dividend along with interest at the rate of 20% p.a. for default period. Decide in the light of provisions of the Companies Act, 2013, whether Mr. Ranjan would succeed? Also state the directors liability in this regard under the Act (CA November 2013)
Answer:
Ranjan will not succeed in claiming interest (3 20% for default period. As per section 127 of Companies Act, 2013, if dividend is not paid within 30 days or dividend warrant is not posted within 30 days, the company is liable to pay simple interest @18% p.a. during the period default continues. Moreover, every director is liable for imprisonment up to 2 years, if he has committed it knowingly. In addition, he is liable to pay fine of ₹ 1,000 per day till time default continue.

Question 8.
CBA Ltd. wants to declare dividend in the year 2013-14 though it will not earn any profit in this year due to heavy losses. The company has been declaring dividend for last 5 years. To maintain its reputation the company wants to declare dividend this year too out of accumulated past profits. Explain how the company can achieve the objective to declare dividend. (CA May 2014)
Answer:
CBA Limited can maintain its reputation by declaration of dividend out of its reserve, if it has sufficient amount available in reserve.

Question 9.
The Board of directors of XYZ Company Limited at its meeting declared a dividend on its paid up equity share capital which was later on approved by the company’s General Meeting. In the meantime the directors at another meeting of the Board decided by passing a resolution to divert the total dividend to be paid to shareholders for purchase of investments for the company. As a result dividend was paid to shareholders after 45 days. Examining the provisions of Companies Act, 2013, state :
(i) Whether the act of directors is in violation of the provisions of the Act and also the consequences that shall follow for the above act of directors?
(ii) What would be your answer in case the amount of dividend to a shareholders is adjusted by the company against certain dues to the company from the shareholders? (CA November 2014)
Answer:
(i) Act of director is not proper.
(it) If dividend paid is adjusted against lien, then non-payment of dividend is not an offence.

Question 10.
As per section 51 of the Companies Act, 2013, a company may, if so authorized by its Articles, pay dividend in proportion to the amount paid up on each shares. (CA November 2014)
Answer:
Statement is correct.

Question 11.
Referring to the provisions of the Companies Act, 2013, examine the validity of the following:
The Board of directors of ABC Ltd. proposes to declare dividend at the rate of 20% to the equity shareholders, despite the fact that the company has defaulted in repayment of public deposits accepted before the com-mencement of this Act. (CA May 2015)
Answer:
As per section 123 of Companies Act, 2013, company cannot declare any dividend if it fails to comply provisions of sections 73 and 74 of the Act until default is made good. Section 73 is related with acceptance and payment of deposit accepted under provisions of Companies Act, 2013 while section 74 deals with repayment of deposits accepted before commencement of Companies Act, 2013. It means, if company has made default in repayment of deposit, it cannot declare dividend until default is made good. This restriction is applicable for declaration of dividend on equity shares.
From the above discussion, it can be suggested that Board of directors of ABC Limited cannot declare dividend to the equity shareholders as it has made default of section 74.

Question 12.
WL Limited is facing loss in business during the current financial year 2015-16. In the immediate preceding three financial years, the company had declared dividend at the rate of 8%, 10% and 12% respectively. To maintain the goodwill of the company, the Board of Directors has decided to declare 12% interim dividend for the current financial year. Examine the applicable provisions of the Companies Act, 2013 and state whether the Board of directors can do so? (CA May 2015)
Answer:
As per section 123 of Companies Act, 2013, Board of Directors may declare interim dividend during financial year out of surplus and profits of current year. It is further provided that if company has incurred loss during the current financial year up to the end of quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.
Average rate of dividends declared by WL Limited during preceding three financial years is 10% (Le. 8+10+12/3). Accordingly, Board of directors can declare interim dividend of not more than 10%.

Question 13.
Star Ltd. declared and paid dividend in time to all its equity holders for the financial year 2014-15, except in the following two cases:
(i) Mrs. Sheela, holding 250 shares had mandated the company to directly deposit the dividend amount in her bank account. The company accordingly remitted the dividend but the bank returned the payment on the ground that there was difference in surname of the payee in the bank records. The company, however, did not inform Mrs. Sheela about this discrepancy.
(ii) Dividend amount of ₹ 50,000 was not paid to Mr. Mohan, deceased, in view of court order restraining the payment due to family dispute about succession.
You are required to analyse these cases with reference to provisions of the Companies Act, 2013 regarding failure to distribute dividends. (CA November 2015)
Answer:
In certain situation if dividend is not paid or dividend warrant is not dispatched within period of 30 days, it is not offence.
(i) Mrs. Sheela has directed company to deposit dividend into her bank account. Accordingly, company has remitted dividend to her bank account but bank returned payment on ground of difference in surname. It is not fault of company, if payment is made as per name available in record of company but company should inform the Mrs. Sheela about returned of dividend payment.
(ii) Accordingly, it can be said that company is not liable for failure to distribute dividend within period of 30 days in case of Mr. Mohan because Court has issued restraining order.

Question 14.
The directors of Som Limited proposed dividend at 12% on equity shares for the financial year 2015-16. The same was approved in the Annual General Meeting of the company held on 20th September, 2016. The directors declared the approved dividends. They seek your opinion on the following matters:
(i) Mr. Ashok, holding equity shares of face value of ₹ 10 lakhs has not paid an amount of ₹ 1 lakh towards call money on shares. Can the same be adjust the dividend amount payable to him?
(ii) Ms. Nini was the holder of 1,000 equity shares on 31 st March 2016, but she has transferred the shares to Mr. Raj, whose name has been registered on 20th May, 2016. Who will be entitled to the above dividend? (CA November 2016)
Answer:
(i) As per Regulation 84 of Table F of the Companies Act, 2013, Board may deduct from any dividend payable to any member all sums of money, if any, presently payable by him to the company on account of calls or otherwise in relation to the shares of company. Accordingly, deduction or adjustment from dividend is permissible if there are calls in arrears or some other amount is payable in relation to the shares of the company. Therefore, company can adjust dividend amount payable to Mr. Ashok against calls due but not paid.

(ii) As per section 123, dividend is paid to the registered shareholder. Listed company close the transfer registers for purpose. Usual practice is to declare that members who are shareholders on date of closure of transfer register will be entitled to dividend. In case of unlisted company and private company, it is not necessary to close register and usually there are very few transfers. General Meeting can decide the cut-off date. It could be date of General Meeting. Accordingly, Mr. Raj, who is registered holder of shares, is entitled to get dividend declared on 20th September 2016.

Question 15.
Supreme Ltd. declared dividend @ 10% on its 10 lakh equity shares of ₹ 10 each on 30th September, 2016. The dividends warrants were dispatched to all the shareholders, except three shareholders, holding in total 50000 shares, due to dispute regarding title over the shares pend-ing in Court. On ascertaining the position on 30th October 2016, it was observed that the dividend warrants for ₹ 1.50 lakhs were not encashed by the remaining shareholders. Explain with reference to provisions of Companies Act, 2013, the actions to be taken by company to deal with the unpaid amount of dividend. Also state the consequences if default is done in this matter. (CA May 2017)
Answer:
If dividend is not paid or claimed within 30 days from date of its declaration, company must transfer the unpaid or unclaimed amount of divided to separate account known as ‘Unpaid Dividend Account of Ltd.’ within 7 days from expiry of 30 days. It also includes amount of dividend, which was not paid due to dispute pending before the Court. Dividend remain unpaid also includes dividend warrants, which were dispatched but not encashed by shareholders.

Accordingly, company should transfer unpaid or unclaimed dividend (includes dividend for which dispute is pending before court) within 7 days after 30th October, 2016. Company should prepare statement containing names of shareholders, their last known addresses and unpaid dividend amount within 90 days from transfer of any amount to unpaid dividend account. Statement is uploaded on website of company and website specified by Central Government for this purpose. Company is required to file Form IEPF 2. Company is liable to pay interest at rate of 12 % p.a. if unpaid amount of dividend is not transferred to separate account within stipulated time.