# Declaration and Payment of Dividend – CA Inter Law Study Material

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

## Declaration and Payment of Dividend – CA Inter Law Study Material

Meaning and Types of dividend

Question 1.
AB Ltd. has issued equity shares having face value of ₹ 10 per share. The shares are currently quoting on the NSE at ₹ 250 per share. The company at its AGM held on 27.07.22 has declared a dividend of 20%. Mr. Shekar owns 1,000 shares which he purchased at ₹ 300 per share. What is the amount of dividend he will receive?
Entitlement of Dividend:

• Dividend is declared as a proportion of Nominal or Face Value of a share.
• Face Value of the share is ₹ 10. So dividend per share is 20% of ₹ 10 = ₹ 2 per share.

Conclusion: Shekar will receive ₹ 2 * 1,000 shares = ₹ 2,000.

Question 2.
The shareholders at an AGM unanimously passed a resolution for payment of dividend at a rate higher than that recommended by the directors. Discuss the validity of the resolution.
Payment of dividend higher than recommended by Directors:

• Articles of Association companies usually contain provisions with regard to declaration of dividend on the pattern of regulations 80 to 85 of Table F to Schedule I of the Companies Act, 2013.
• Under regulation 80, the power to declare a dividend vests with the general meeting, but not even all the shareholders have the power to declare a dividend exceeding the amount recommended by the Board of Directors.

Conclusion: Resolution passed by the shareholders is invalid.

Declaration of Dividend (Sec. 123)

Question 3.
Shreyas Mechanics Limited owns a plot of land which was purchased long before. As the property rates are going up, it is decided to revalue the plot at fair value which is moderately ten times the original price, thus resulting in a revaluation profit of ₹ 20,00,000. The Board of Directors is keen to utilize this ₹ 20,00,000 along with free reserves of ₹ 24,00,000 for declaration of dividend at the forthcoming Annual General Meeting (AGM) to be held on 28th September, 2021,
Declaration of Dividend out of Revaluation Reserves:

As per Sec. 123(1) of the Companies Act, 2013, no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Sec. 123(2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both.

In computing profits, any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded.

Conclusion: Amount of ₹ 20,00,000 cannot be considered as it does not form part of Free Reserves as the same cannot be utilized towards declaration of dividend.

Question 4.
For the current year, Alma Watches Limited proposes to transfer more than 10% of its profits to the reserves before declaration of dividend at the rate of 12%. Can the company do so?
Transfer to reserves before declaration of dividend:

• As per Sec. 123 of the Companies Act, 2013, a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company.
• Transfer to reserves is not mandatory and the percentage to be transferred to reserves is at the discretion of the company.

Conclusion: Alma Watches Limited is free to transfer any part of its profits to reserves as it may deem
fit.

Question 5.
XYZ Limited has earned a profit of ₹ 1,000 crores for the financial year 2021-22. It has proposed a dividend @ 8,75%. However, it does not intend to transfer any amount to the reserves out of the profits earned. Can the company do so?
Transfer to reserves before declaration of dividend:

• As per Sec. 123 of the Companies Act, 2013, a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company.
• Transfer to reserves is not mandatory and the percentage to be transferred to reserves is at the discretion of the company.

Conclusion: XYZ Limited is justified in its action if it does not transfer any amount of profits to the
reserves.

Question 6.
Capricorn Industries Limited has a paid-up capital of ₹ 200 lakhs and accumulated Reserves of ₹ 240
lakhs. Loss for the year ending on 31st March 2022 is = ₹ 30 Lakhs. Dividend was declared at the following rates during the three years immediately preceding-
Year 1 9%
Year 2 10%
Year 3 12%
What is the maximum rate at which the company can declare dividend for the current year.
Maximum Rate for declaration of dividend:
As per 2nd Proviso to Sec. 123 (1) of the Companies Act, 2013, in the event of inadequacy or absence of profits in any financial year, a company may declare dividend out of the accumulated profits of previous years which have been transferred to the free reserves. However, such declaration shall be subject to the following conditions as per Rule 3 of Companies [Declaration and Payment of Dividend] Rules, 2014.

1. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the immediately preceding three years.
2. The total amount to be drawn from free reserves shall not exceed one-tenth i.e., 10% of its paid- up share capital and free reserves as per the latest audited financial statement.
3. The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared and only thereafter, any dividend in respect of equity shares shall be declared.
4. After such withdrawal from free reserves, the residual reserves shall not fall below 15% of its paid-up share capital as per the latest audited financial statement.

In the given case, Capricorn Industries Limited has not made adequate profits during the current year ending on 31st March, 2022, but it still wants to declare dividend. Let us apply the conditions:

Condition I: Average rate of Dividend = 10.3% $$\frac{(9 \%+10 \%+12 \%)}{3}$$
Therefore, the rate of dividend shall not exceed 10.3%. i.e. 10.3% of paid-up Capital i.e. ₹ 200 lakhs = ₹ 20.6 lakhs

Condition II: Paid-up capital + Free reserves = ₹ 200 lakhs + ₹ 240 lakhs
(Assuming all reserves are free = ₹ 440 lakhs 10% thereof = ₹ 44 lakhs
Less: loss for the year = ₹ 30 lakhs
Amount available = ₹ 14 lakhs
Hence the quantum of dividend is further restricted to ₹ 14 lakhs.

Condition III: Accumulated Reserves = ₹ 240 lakhs
Proposed withdrawal = ₹ 14 lakhs
Balance of Reserves = ₹ 226 lakhs
This is more than 15% of paid-up capital (i.e. 15% of ₹ 200 lakhs) i.e. ₹ 30 lakhs.

Conclusion: Company can declare a dividend of ₹ 14 lakhs i.e. at a rate of 7% on its paid-up capital of ₹ 200 lakhs.

Question 7.
Shipra Sugar Mills Limited has been regularly declaring dividend at the rate of 20% on its equity shares for the past 3 years. However, the company has not made adequate profits during the current year ending on 31st March, 2022, but it has got adequate free reserves which can be utilized for maintaining the rate of dividend at 20%.

Advise the company as to how it should proceed in the matter if it wants to declare dividend at the rate of 20% for the year 2021-22, as per the provisions of the Companies Act, 2013.
Declaration of dividend out of Reserves:
As per Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014, company can declare dividend out of its accumulated free reserves subject to satisfaction of the following conditions:

• The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the immediately preceding 3 years.
• The total amount to be drawn from free reserves shall not exceed 10% of its paid-up share capital and free reserves as per the latest audited financial statement.
• The amount so drawn shall first be utilised to set off the losses incurred in the current financial year and only thereafter, dividend at 20% shall be declared.
• After such withdrawal from free reserves, the residual reserves shall not fall below 15% of its paid-up share capital as per the latest audited financial statement.

Company is advised to get the desired dividend recommended by the Board of Directors and propose the same for the approval of the members at the ensuing Annual General Meeting as the authority to declare dividend lies with the members of the company.

Question 8.
During the financial year 2021-22, Perfect Limited declared an interim dividend for the second time. After declaration, the Board of Directors decided to revoke the second interim dividend as its financial position was poor, to accommodate the said interim dividend.

1. Examine the validity of the Board’s decision under the provisions of the Companies Act, 2013.
2. Examine what will be your answer, if the Board proposes to transfer more than 10% of the profits of the company to the reserves for the current year before the declaration of any dividend? [MTP-March 18]

Revocation of Interim Dividend:

• As per Sec. 123(3) of the Companies Act, 2013, the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.
• A dividend when declared becomes a debt and a shareholder is entitled to recovery of the same after expiry of 30 days as prescribed u/s 127 of the Companies Act, 2013.
• Section 2(14A) of the Act defines dividend to include interim dividend. Therefore, dividend once declared becomes a debt and payable within 30 days of declaration.
• In the present case, Perfect Limited declared an interim dividend for the second time. After declaration, the Board of Directors decided to revoke the second interim dividend as its financial position was poor.

Conclusion: Board of Directors cannot revoke the second interim dividend. Therefore, decision of the
Board to revoke the declared 2nd Interim dividend is invalid.

Question 9.
The Director of Happy Limited proposed dividend at 12% on equity shares for the financial year 2021-22. The same was approved in the annual general meeting of the company held on 20th September, 2022. The Directors declared the approved dividends. Analysing the provisions of the Companies Act, 2013, give your opinion on the following matter:

Ms. N was the holder of 1,000 equity shares on 31st March, 2022, but she has transferred the shares to Mr. R, whose name has been registered on 20th May, 2022. Who will be entitled to the above dividend? [RTP-May 18, MTP-Oct. 18]
Entitlement of Dividend:

• As per Sec. 123(5) of the Companies Act, 2013, dividend shall be payable only to the registered shareholder of the share or to his order or to his banker.
• Record date is the date announced by the company for determining entitlement to dividend. All those persons whose name is included in the register of members on that date shall be entitled to dividend.
• In the given case, Ms. N, the holder of equity shares transferred the shares to Mr. R whose name has been registered on 20th May 2022.

Conclusion: Since Ms. N became the registered shareholder before the declaration of the dividend in the Annual General Meeting of the company held on 20th September 2022, so he will be entitled to the dividend.

Question 10.
MNP Ltd. has a paid-up share capital of ₹ 10 crores and free reserves of ₹ 50 crores, as on 31st March, 2022.The company made a loss of ₹ 40 lakhs after providing for depreciation for the year ended on 31st March, 2022 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 20% on the equity shares payable out of free reserves. The average dividend declared by the company in the last three years is 2 5%. Referring to the provisions of the Companies Act, 2013, examine the validity of declaration of dividend. [RTP-May 20]
Declaration of Dividend out of reserves:
As per 2nd proviso to Sec. 123(1) of the Companies Act, 2013, in the event of inadequacy or absence of profits in any financial year, a company may declare dividend out of the accumulated profits of previous years which have been transferred to the free reserves. However, such declaration shall be subject to the following conditions as per Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014.

(i) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the immediately preceding three years.
In the given case, present rate of dividend is 20% and average dividend declared in the last three years is 25%. So, this condition is fulfilled.

(ii) The total amount to be drawn from free reserves shall not exceed one-tenth i.e., 10% of its paid- up share capital and free reserves as per the latest audited financial statement.
Amount of dividend proposed: ₹ 2 crores (20% of ₹ 10 crore i.e. on paid-up capital)
10% of paid-up share capital and free reserves: 10% of (10 crore + 50 crore) = ₹ 6 crore.
This condition is fulfilled as amount of dividend is not exceeding 10% of its paid-up share capital and free reserves.

(iii) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared and only thereafter, any dividend in respect of equity shares shall be declared.

(iv) After such withdrawal from free reserves, the residual reserves shall not fall below 15% of its paid-up share capital as per the latest audited financial statement.
Balance of reserves after payment of dividend: ₹ 48 crore (50 crore – 2 crore)
15% of paid-up share capital: ₹ 1.5 crore (15% of 10 crore)
This condition is fulfilled.

Conclusion: After considering all the conditions, it can be said that declaration of dividend by MNP Ltd. is valid.

Question 11.
PET Ltd., incurred loss in business upto current quarter of financial year 2021-22. The company has declared dividend at the rate of 12%, 15% and 18% respectively in the immediate preceding three years. In spite of the loss, the Board of Directors of the company have decided to declare interim dividend @ 15% for the current financial year. Examine the decision of PET Ltd. stating the provisions of declaration of interim dividend under the Companies Act, 2013. [May 18 (4 Marks); MTP-Aug. 18, March 19, May 20]
Declaration of Interim Dividend:

As per Sec. 123(3) of the Companies Act, 2013, the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.

However, in case the company has incurred 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.

In the instant case, interim dividend by PET Ltd. shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years [i.e. (12+15+18)/3 = 45/3 =15%].

Conclusion: Decision of Board of Directors to declare 15% of the interim dividend for the current
financial year is tenable.

Question 12.
Alpha Ltd., a Sec. 8 company is planning to declare dividend in the AGM for the Financial Year ended on 31-03-2022. Mr. Chopra is holding 800 equity shares as on date. State whether the act of the company is according to the provisions of the Companies Act, 2013. [May 18 (2 Marks), MTP-Oct. 20; RTP-May 21]
Declaration of dividend by Sec. 8 company:

As required by Sec. 8 of the Companies Act, 2013, the companies licenced u/s 8 of the Act (Formation of companies with Charitable Objects, etc.) are prohibited from paying any dividend to their members. Their profits are intended to be applied only in promoting the objects for which they are formed.

In the given case, Alpha Ltd., a section 8 Company is planning to declare dividend in the Annual General Meeting for the Financial Year ended 31.03.2021.

Conclusion: Proposed act of Alpha Ltd. to declare dividend, is not in accordance to the provisions of the Companies Act, 2013.

Question 13.
YZ Ltd. is a manufacturing company & has proposed a dividend @ 10% for the year 2021-22 out of the current year profits. The company has earned a profit of f 910 crores during 2021-22. YZ Ltd. does not intend to transfer any amount to the general reserves of the company out of current year profit. Is YZ Ltd. allowed to do so? Comment. [Nov, 18 (2 Marks), MTP-March 19, April 19, Oct. 20]
Transfer to reserves before declaration of dividend:

• As per Sec. 123 of the Companies Act, 2013, a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company.
• Transfer to reserves is not mandatory and the percentage to be transferred to reserves is at the discretion of the company.
• In the given case, YZ Ltd. has earned a profit of ₹ 910 crores for the financial year 2021-22. It has proposed a dividend @ 10%. However, it does not intend to transfer any amount to the reserves of the company out of current year profit.

Conclusion: Amount to be transferred to reserves out of profits for a financial year is at the discretion
of the YZ Ltd. acting vide its Board of Directors.

Question 14.
Alex Ltd, is facing loss in business during the financial year 2021-22. In the immediate preceding three financial years, the company had declared dividend at the rate of 7%, 11% and 12% respectively. The Board of Directors has decided to declare 12% interim dividend for the current financial year atleast to be in par with the immediate preceding year. Is the act of the Board of Directors valid? Give your answer as per the provisions of the Companies Act, 2013. [May 19 (3 Marks), MTP-April 21, April 22]
Declaration of Interim Dividend:

As per Sec. 123(3) of the Companies Act, 2013, the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.

However, in case the company has incurred 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 3 financial years.

In the given case, Alex Ltd. is facing loss in business during the financial year 2021-22. In the immediate preceding 3 financial years, the company declared dividend at the rate of 7%, 11% and 12% respectively.

Conclusion: Rate of dividend declared shall not exceed 10%, the average of the rates (7+11+12=30/3)
at which dividend was declared by it during the immediately preceding three financial years.
Therefore, the act of the Board of Directors as to declaration of interim dividend at the rate of 12%
during the F.Y. 2021-22 is not valid.

Question 15.
The Directors of East West Limited proposed dividend at 15% on equity shares for the financial year 2021-22. The same was approved in the Annual general body meeting held on 24th October, 2022. The Directors declared the approved dividends.

Mr. Binoy was the holder of 2,000 equity of shares on 31st March, 2022, but he transferred the shares to Mr. Mohan, whose name has been registered on 18th June, 2022. Who will be entitled to the above dividend? [May 19 (2 Marks)]
Entitlement of Dividend:

• As per Sec. 123(5) of the Companies Act, 2013, dividend shall be payable only to the registered shareholder of the share or to his order or to his banker.
• Record date is the date announced by the company for determining entitlement to dividend. All those persons whose name is included in the register of members on that date shall be entitled to dividend.
• In the given case, Mr. Binoy, the holder of equity shares transferred the shares to Mr. Mohan, whose name has been registered on 18th June, 2022.

Conclusion: Since Mr. Mohan became the registered shareholder before the declaration of the dividend in the Annual general meeting of the company held on 24th Oct., 2022, so he will be entitled to the dividend.

Question 16.
Referring to the provisions of the Companies Act, 2013, examine the validity of the following:

(i) The Board of Directors of ABC Tractors Limited 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 commencement of this Act
(ii) Whether a Company can declare dividend for the financial year in which it incurred loss. [Nov. 19 (5 Marks)]

(i) Declaration of Dividend:
Sec. 123(6) of the Companies Act, 2013, specifically provides that a company which fails to comply with the provisions of Sec. 73 (Prohibition of acceptance of deposits from public) and Sec. 74 (Repayment of deposits, etc., accepted before the commencement of this Act) shall not, so long as such failure continues, declare any dividend on its equity shares.

In the given instance, the Board of Directors of ABC Tractors Limited proposes to declare dividend at the rate of 20% to the equity shareholders, in spite of the fact that the company has defaulted in repayment of public deposits accepted before the commencement of the Companies Act, 2013. Hence, declaration of dividend by the ABC Tractors Limited is not valid.

(ii) Declaration of dividend in case of loss:
As per 2nd proviso to Sec. 123(1) of the Companies Act, 2013, in the event of inadequacy or absence of profits in any financial year, a company may declare dividend out of the accumulated profits of previous years which have been transferred to the free reserves. However, such declaration of dividend shall be subject to the conditions as prescribed under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.

Question 17.
AB Limited is a public company having its registered office in Coimbatore. The company has incurred a net loss of ₹ 20 lakhs in the Financial Year (FY) 2021-22. The Board of Directors (BoD) wants to declare dividend for the FY 2021-22. The balances of the company as per the latest audited financial statements are as follows:

1. Equity Share Capital (₹ 10 each) ₹ 100 lakhs
2. General Reserve ₹ 150 lakhs
3. Debenture redemption Reserve ₹ 50 lakhs

The company has not declared any dividend in the preceding three financial years. Decide whether AB Limited is allowed to declare dividend or not for the FY 2021-22 by explaining the relevant provisions of the Companies Act in this regard.

If allowed to declare dividend then state the maximum amount of dividend that can be paid by AB Limited as per the Section 123 of Companies Act, 2013. [Nov. 20 (4 Marks)]
Declaration of Dividend out of Reserves:

As per 2nd proviso to Sec. 123(1) of the Companies Act, 2013, in the event of inadequacy or absence of profits in any financial year, a company may declare dividend out of the accumulated profits of previous years which have been transferred to the free reserves. However, such declaration shall be subject to the following conditions as per Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014:

Condition I: The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the three years immediately preceding that year.
Since the company has not declared any dividend in the preceding three financial years, hence condition 1 is not applicable in this case.

Condition II: The total amount to be drawn from such accumulated profits shall not exceed 10% of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
Paid-up capital + Free reserves = ₹ 100 lakh + ₹ 150 lakhs
= ₹ 250 lakhs
10% thereof = ₹ 25 lakhs

Condition III: The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.
The amount drawn as stated above = ₹ 25 lakhs
Less: Loss for the financial year 2021-22 = ₹ 20 lakhs
Amount available = ₹ 5 lakhs
Hence, the quantum of dividend is further restricted to ₹ 5 lakhs.

Condition IV: The balance of reserves after such withdrawal shall not fall below 15% of its paid-up share capital as appearing in the latest audited financial statement.
Accumulated Reserves = ₹ 150 lakhs
Proposed withdrawal = ₹ 5 lakhs
Balance of Reserves = ₹ 145 lakhs
This is more than 15% of paid-up capital (i.e. 15% of ₹ 100 lakhs) i.e. ₹ 15 lakhs.
Thus, the company can declare a dividend of % 5 lakhs.

Conclusion: AB Limited is allowed to declare dividend for the FY 2021-22 and the maximum amount of dividend that can be paid is ₹ 5 lakhs.

Question 18.
Vishal Limited has paid dividend consistently every year at the rate of 10% on its equity share capital in the last 5 years (2017-18 to 2021-22). The company has incurred loss in the current financial year (FY 2022-23). It still wants to declare dividend for the FY 2022-23. Whether the company can do so? Explain, [RTP-May 22]
Declaration of Dividend out of Reserves:
As per 2nd proviso to Sec. 123(1) of the Companies Act, 2013, in the event of inadequacy or absence of profits in any financial year, a company may declare dividend out of the accumulated profits of previous years which have been transferred to the free reserves. However, such declaration shall be subject to the following conditions as per Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014:

(a) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the 3 years immediately preceding that year:
Provided that this sub-rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

(b) The total amount to be drawn from such accumulated profits shall not exceed 10% of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(c) The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared and only thereafter, any dividend in respect of equity shares shall be declared.

(d) The balance of reserves after such withdrawal shall not fall below 15% of its paid -up share capital as appearing in the latest audited financial statement.

Hence, if the company wants to pay dividend in the current financial year, it can do so if all the above
conditions have been fulfilled.

Unpaid dividend A/c (Sec. 124)

Question 19.
RST Ltd. declared dividend at the rate of 20% for the financial year 2021-22 in the ACM scheduled on 15th June 2022. As RST Ltd. is left with certain unpaid and unclaimed dividend, it transferred amount of unpaid and unclaimed dividend to UDA (Unpaid Dividend Account).

After remaining unpaid and unclaimed for more than 2 years in the UDA, some of the entitled shareholders made liable RST Ltd. for non-compliance of section 124, and claimed for their unpaid dividend amount. RST Ltd. denies saying that there were certain legal issues on the entitlement of the dividend amount to the respective shareholders.

State in the light of the given facts, whether the allegation marked by shareholders and claim for the dividend amount, against RST Ltd. is justifiable? [RTP-May 19]
Unpaid Dividend Account:

As per Sec. 124 of the Companies Act. 2013, where a dividend has been declared by a company but has not been paid/claimed to/by shareholder within 30 days from the date of the declaration, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid/unclaimed to the Unpaid Dividend Account.

The company shall, within a period of 90 days of making any transfer of an amount, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed.

In the given situation, RST Ltd. failed to give statement of Unpaid/unclaimed dividend and so liable for the said non-compliance of Sec. 124 of the Companies Act, 2013.

Any person claiming to be entitled to any money transferred u/s 124(1) to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed.

Since RST Ltd. failed to comply with the requirements of this section as to the preparing of a statement of unpaid dividend, company shall be liable to a penalty of ₹ 1 lakh and in case of continuing failure, with a further penalty of ₹ 500 for each day after the first during which such failure continues, subject to a maximum of ₹ 10 lakh and every officer of the company who is in default shall be liable to a penalty of ₹ 25,000 and in case of continuing failure, with a further penalty of ₹ 100 for each day after the first during which such failure continues, subject to a maximum of ₹ 2 lakh.

Question 20.
Mr. R, holder of 1,000 equity shares of ₹ 10 each of AB Ltd. approached the Company in the last week of September, 2022 with a claim for the payment of dividend of ₹ 2,000 declared @ 20% by the Company at its AGM held on 31.08.2014 with respect to the financial year 2013-14. The Company refused to accept the request of R and informed him that his shares on which dividend has not been claimed till date, have also been transferred to the IEPF.

Examine, in the light of the provisions of the Companies Act, 2013, the validity of the decision of the Company and suggest the remedy, if available, to him for obtaining the unclaimed amount of dividend and retransfer of corresponding shares in his name. [Jan. 21 (5 Marks)]
Rights of the member over unclaimed dividend:
Sec. 124 of the Companies Act, 2013 deals with the provisions relating to rights of members over the unclaimed dividend and the related shares. Provisions of Sec. 124 are as follows:

(1) Where a dividend has been declared by a company but has not been paid or claimed within 30 days from the date of declaration, the company shall, within 7 days from the expiry of the said period of 30 days, transfer the total amount of unpaid or unclaimed dividend to a special account called the Unpaid Dividend Account.

(2) Any money transferred to the Unpaid Dividend Account which remains unpaid or unclaimed for a period of 7 years from the date of such transfer shall be transferred by the company along with interest accrued thereon to the Investor Education and Protection Fund [IEPF].

(3) All shares in respect of which dividend has not been paid or claimed for 7 consecutive years or more shall be transferred by the company in the name of IEPF along with a statement containing the prescribed details.

(4) Any claimant of shares so transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor Education and Protection Fund in accordance with the prescribed procedure and on submission of prescribed documents.

As per the provisions of Sec. 125(3) of the Companies Act, 2013, read with rule 7 of IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, any person, whose unclaimed dividends have been transferred to the Fund, may apply for refund, to the Authority, by submitting an online application.

In the given question, Mr. R did not claim the payment of dividend on his shares for a period of more than 7 years {i.e. expiry of 30 days from 31.08.2014 to last week of September 2022). As a result, his unclaimed dividend (₹ 2,000) along with such shares (1,000 equity shares) must have been transferred to IEPF Account. Therefore, the company is justified in refusing to accept the request of Mr. R for the payment of dividend of ₹ 2,000 (declared in Annual General Meeting on 31.8.2014).

In the given circumstances, Mr. R should be advised as under:

1. If Mr. R wants to reclaim the transferred shares, he should apply to IEPF authorities along with the necessary documents in accordance with the prescribed procedure.
2. He is also entitled to get refund of the dividend amount, which was transferred to the above fund in accordance with the prescribed rules.

Investor Education and Protection Fund (Sec. 125)

Question 21.
State any 6 amounts that can be credited to the investor Education and Protection Fund. Give your answer as per the provisions of the Companies Act, 2013. [MTP-April 19]
Amount to be credited to the IEPF:

In accordance with the provisions of Sec. 125(2) of the Companies Act, 2013, following amount shall be credited to IEPF:

(a) Amount given by the C.G. by way of grants after due appropriation made by Parliament by law in this behalf;
(b) Donations given to the Fund by the C.G., State Governments, companies or any other institution;
(c) Amount in the Unpaid Dividend Account of companies;
(d) Amount in the general revenue account of the C.G. which had been transferred to that account u/s 205A(5) of the Companies Act, 1956, as it stood immediately before the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the commencement of this Act;
(e) the amount lying in the Investor Education and Protection Fund u/s 205C of the Companies Act, 1956;
(f) the interest or other income received out of investments made from the Fund;
(g) the amount received under sub-section (4) of section 38;
(h) the application money received by companies for allotment of any securities and due for refund;
(i) matured deposits with companies other than banking companies;
(j) matured debentures with companies;
(k) interest accrued on the amounts referred to in clauses (h) to (j);
(l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for seven or more years;
(m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years; and
(n) such other amount as may be prescribed.

Punishment for Failure to Distribute Dividends (Sec. 127)

Question 22.
The Director of Happy Limited proposed dividend at 12% on equity shares for the financial year 2020-21. The same was approved in the annual general meeting of the company held on 20th September, 2021. The Directors declared the approved dividends. Analysing the provisions of the Companies Act, 2013, give your opinion on the following matter:
Mr. A, 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 adjusted against the dividend amount payable to him? [RTP-May 18, MTP-Oct. 18, Oct 21)
Adjustment of Dividend against call money:

As per the proviso to Sec. 127 of the Companies Act, 2013, no offence will be said to have been committed by a director for adjusting the calls in arrears remaining unpaid or any other sum due from a member from the dividend as is declared by a company.

In the given case, Mr. A is holding equity shares of face value of ₹ 10 lakhs and has not paid an amount of ₹ 1 lakh towards call money on shares. Mr. A is eligible to get ₹ 1.20 lakh towards dividend, out of which an amount of ₹ 1 lakh can be adjusted towards call money due on his shares. ₹ 20,000 can be paid to him in cash or by cheque or in any electronic mode.

Conclusion: Company can adjust sum of ₹ 1 lakh due towards call money on shares against the
dividend amount payable to Mr. A.

Question 23.
Karan was holding 5,000 equity shares of ₹ 100 each of M/s. Future Ltd. A final call of ₹ 10 per share was not paid by Karan. M/s. Future Ltd. declared dividend of 10%. Examine with reference to relevant provisions of the Companies Act, 2013, the amount of dividend Karan should receive. [Nov. 18 (3 Marks), MTP-April 19, March 21; RTP-May 21]
Adjustment of Dividend against call money:
As per the proviso to Sec. 127 of the Companies Act, 2013, no offence will be said to have been committed by a director for adjusting the calls in arrears remaining unpaid or any other sum due from a member from the dividend as is declared by a company.

Conclusion: M/s Future Ltd. can adjust the sum of ₹ 50,000 unpaid call money against the declared dividend of 10%, i.e. 5,00,000 × 10/100 = 50,000. Hence, Karan’s unpaid call money (₹ 50,000) can be adjusted fully from the entitled dividend amount of ₹ 50,000.

Question 24.
Mars Ltd. declared and paid dividend in time to all its equity holders for the financial year 2020-21, except in the following two cases:

(i) Mrs. Sheetal, 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. Sheetal about this discrepancy.

(ii) Dividend amount of ₹ 50,000 was not paid to Mr. Piyush, 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. [MTP-Oct 19]
Penalty for non-payment of dividend:

(i) Sec. 127 of the Companies Act, 2013 provides for punishment for failure to distribute dividend on time. One of such situations is where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has not been communicated to shareholder.

In the given situation, the company has failed to communicate to the shareholder Mrs. Sheetal about non-compliance of her direction regarding payment of dividend. Hence, the penal provisions under section 127 will be applicable.

(ii) As per Sec. 127 of the Companies Act, 2013, no offence shall be deemed to have been committed where the dividend could not be paid by reason of operation of law.

In the given situation, the dividend could not be paid because it was not allowed to be paid by the court until the matter was resolved about succession.

Conclusion: There will not be any liability on the company and its directors etc.

Question 25.
The AGM of ABC Limited held on 30.05.2021 declared a dividend at the rate of 30% payable on paid- up equity share capital of the company as recommended by Board of Directors. But the Company was unable to post the dividend warrant to Mr. Ranjan, an equity shareholder of the Company, up to 30th ]une, 2021. 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 [MTP-Oct 19]
Penalty for non-payment of dividend:

Sec. 127 of the Companies Act, 2013 lays down the penalty for non-payment of dividend within the prescribed time period of 30 days. According to this section where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 30 days from the date of declaration of dividend to any shareholder entitled to the payment of dividend:

(a) every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment maximum up to 2 years and with minimum fine of ₹ 1,000 for every day during which such default continues; and

(b) the company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.

Conclusion: Mr. Ranjan will not succeed if he claims interest at 20% interest as the limit u/s 127 is 18% per annum.

Question 26.
PQ Ltd. declared and paid 10% dividend to all its shareholders except Mr. Kumar, holding 500 equity shares, who instructed the company to deposit the dividend amount directly in his bank account. The company accordingly remitted the dividend, but the bank returned the payment on the ground that the account number as given by Mr. Kumar doesn’t tally with the records of the bank.

The company, however, did not inform Mr. Kumar about this discrepancy. Comment on this issue with reference to the provisions of the Companies Act, 2013 regarding failure to distribute dividend. [May 19 (2 Marks), MTP-March 21]
Penalty for non-payment of dividend:

Sec. 127 of the Companies Act, 2013 provides for punishment for failure to distribute dividend on time. One of such situations is where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has not been communicated to the shareholder.

In the instant case, PQ Ltd. has failed to communicate to the shareholder Mr. Kumar about non compliance of his direction regarding payment of dividend.

Conclusion: Penal provisions u/s 127 will be attracted.

Question 27.
ASR Limited declared dividend at its Annual General Meeting held on 31.12.2021. The dividend warrant to Mr. A, a shareholder was posted on 22nd January, 2022. Due to postal delay Mr. A received the warrant on 5th February, 2022 and encashed it subsequently. Can Mr. A initiate action against the company for failure to distribute the dividend within 30 days of declaration under the provisions of the Companies Act, 2013? [July 21 (3 Marks)]
Penalty for failure to pay dividend:

• Sec. 127 ofthe Companies Act, 2013, requires that the declared dividend must be paid to the entitled shareholders within the prescribed time limit of 30 days from the date of declaration of dividend.
• In case dividend is paid by issuing dividend warrants, such warrants must be posted at the registered addresses within the prescribed time. Once posted, it is immaterial whether the same are received within 30 days by the shareholders or not.
• In the given case, the dividend was declared on 31.12.2021 and the dividend warrant was posted within 30 days from date of declaration of dividend (posted on 22nd January, 2022). It is immaterial if Mr. A has received it on 5th February 2022 [i.e., post 30 days from 31.12.2021).

Conclusion: Mr. A cannot initiate action against the company.

Question 28.
ABC Ltd. has declared dividend of ₹ 2/- per equity share in the general meeting. Mr. Suresh is holding 5000 equity shares of ₹ 10 face value each, on which f 10,000 towards call money is due. Whether the dividend amount payable to him be adjusted against such dues as per the provisions of the Companies Act, 2013? Give reasons for your answer. [May 22 (2 Marks)]
Adjustment of Dividend against call money:

As per the proviso to Sec. 127 of the Companies Act, 2013, no offence will be said to have been committed by a director for adjusting the calls in arrears remaining unpaid or any other sum due from a member from the dividend as is declared by a company.

In the given case, Mr. Suresh is holding 5000 equity shares of face value of ₹ 10 each and has not paid an amount of ₹ 10,000 towards call money on shares. Mr. Suresh is entitled for dividend of ₹ 10,000, but this amount can be adjusted towards call money due on his shares.

Conclusion: Company can adjust sum of ₹ 10,000 due towards call money on shares against the dividend amount payable to Mr. Suresh.

Other Comprehensive Questions

Question 29.
Sun Light Limited was incorporated on 22nd January, 2021 with the objects of providing software services. The Company adopted its first financial year as from 22nd January, 2021 to 31st March, 2022. The financial statement for the said period, after providing for depreciation in accordance with Schedule il of the Companies Act, 2013 revealed net profit The Board of Directors declared 20% interim dividend at their meeting held on 7th July, 2022, before holding its first Annual General Meeting. In the light of the provisions of the Companies Act 2013 and Rules made thereunder:

(i) Whether the Company has complied due diligence in declaring interim dividend?
(ii) Whether the Company can declare dividend in case it was registered under Section 8 of the Companies Act, 2013?
(iii) What are the penal consequences in case of failure to pay the interim dividend? [Nov. 20 (4 Marks)]

Declaration of Dividend:

(i) As per Sec. 123(3) of the Companies Act, 2013, the Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the AGM out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend.

In the given case, Sun Light Limited has complied due diligence in declaring interim dividend as the Interim Dividend was declared by Board of Directors at their meeting held on 7th July, 2022 before holding its first AGM. Also, the financial statement revealed net profit so the interim dividend can be paid out of profits of the financial year ending on 31st March, 2022.

(ii) As per Sec. 8 of the Companies Act, 2013, a company having licence u/s 8 (Formation of companies with charitable objects, etc.) is prohibited from paying any dividend to its members. Its profits are intended to be applied only in promoting the objects for which it is formed.

(iii) Penal consequences:
As per Sec. 127 of the Companies Act, 2013, where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to 2 years and with fine which shall not be less than ₹ 1,000 for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.

Question 30.
The Board of Directors of GEN X Fashions Limited at its meeting recommended a dividend on its paid- up equity share capital which was later on approved by the shareholders at the Annual General Meeting. Thereafter, the directors at another meeting of the Board passed a board resolution for diverting the total dividend to be paid to the shareholders for purchase of certain short-term investments in the name of the company.

As a result, dividend was paid to shareholders after 45 days. Examining the provisions of the Companies Act, 2013, state whether the act of directors is in violation of the provisions of the Act and if so, state the consequences that shall follow for the above violative act. (MTP-Nov. 21, RTP-Nov. 21, Dec. 21 (2 Marks)]
Penalty for non-payment of dividend:

As per Sec. 124 of the Companies Act, 2013, where a dividend has been declared by a company but has not been paid or claimed within 30 days from the date of the declaration, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in any scheduled bank to be called the Unpaid Dividend Account.

Further, as per Sec. 127 of the Companies Act, 2013, where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 30 days from the date of declaration to any entitled shareholder, every director of the company shall, if he is knowingly a party to the default, be liable for punishment.

In the present case, the Board of Directors of GEN X Fashions Limited at its meeting recommended a dividend on its paid-up equity share capital which was later on approved by the shareholders at the Annual General Meeting.,

Thereafter, the directors at another meeting of the Board decided by passing a board resolution for diverting the total dividend to be paid to the shareholders for purchase of certain short-term investments in the name of the company. As a result, dividend was paid to shareholders after 45 days.

Conclusion: Based on the above stated provisions, following conclusions may be drawn:

(a) Since, declared dividend has not been paid within 30 days from the date of the declaration to any shareholder entitled to the payment of dividend, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in any scheduled bank to be called the Unpaid Dividend Account.

(b) Board of Directors has violated Sec. 127 of the Companies Act, 2013 as it failed to pay dividend to shareholders within 30 days due to its decision to divert the total dividend to be paid to shareholders for purchase of certain short-term investments in the name of the company.

Consequences: The following are the consequences for violation of the above provisions:

1. Every director of the company shall, if he is knowingly a party to the default, be punishable with maximum imprisonment of two years and shall also be liable for a minimum fine ₹ 1,000 for every day during which such default continues.
2. The company shall also be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.