Distribution of Profits and Dividend – Company Law Important Questions
Distinguish between: Interim Dividend and Final Dividend. (December 2014) (4 marks)
|Basis of Distinction||Interim Dividend||Final Dividend|
|Meaning||The dividend which is paid in the middle of the year is known as an interim dividend.||A dividend that is recommended by the Board of Directors and approved by the shareholders in AGM is known as the final dividend.|
|Nature of Meeting for Declaration||Interim dividend can be declared by the board of directors and it does not require approval of the shareholder.||The final dividend is recommended by the Board of directors and must be approved by the shareholders.|
|Decrease in Rate||Since interim dividend does not require approval of shareholders, the rate of interim dividend cannot be decreased.||The shareholders cannot increase the rate of dividend than the one recommended by the Board. The shareholders may, however, declare the payment of dividend on equity shares at a rate lower than the one recommended by the directors in their report.|
|Sources||A company may declare an 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 company can pay the final dividend from the following sources:
Write a short note on Interim Dividend. (June 2009) (4 marks)
- The dividend is said to be an interim dividend if it is declared by the Board of Directors between two annual general meetings of the company.
- The Interim dividend when declared become debt.
- All the provisions relating to the payment of dividend shall be applicable on the interim dividend also.
- SS-3 defines interim dividend so as to mean the Dividend declared by the Board of Directors.
Write a short note on Investor Education and Protection Fund. (June 2010) (4 marks)
Write a short note on Investor Education and Protection Fund. (June 2013) (4 marks)
Rise Limited, a company with diversified interests, has constituted Inves-tor Education and Protection Fund as required under the provisions of the Companies Act, 2013. The company has so far not deposited any amount to the fund. The President (Finance) has asked you, the Company Secretary, to submit a note on accounts payable to the credit of the fund and the period within which amount shall be paid. Prepare the said note. (December 2016) (4 marks)
Establishment of Investor Education and Protection Fund [Section 125(1)]:
The Central Government shall establish a Fund to be called the Investor Education and Protection Fund. Section 125(2) prescribes that the following shall be credited to the Fund.
Amount Credited to Fund [Section 125(2)]:
There shall be credited to the Fund:
(a) the amount is given by the Central Government by way of grants after due appropriation made by Parliament by law in this behalf for being utilised for the purposes of the Fund;
(b) donations are given to the Fund by the Central Government, State Governments, companies or any other institution for the purposes of the Fund;
(c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-section (5) of section 124;
(d) the amount in the general revenue account of the Central Government which had been transferred to that account under sub-section (5) of section 205A 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 under section 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 a 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.
Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such amount has remained unclaimed and unpaid for a period of seven years from the date it became due for payment.
Write a short note on Divisible Profits. (December 2011) (4 marks)
- Divisible profit means the profits that the law allows the company to distribute to the shareholders by way of dividend.
- “Profits available for dividend” has been held to mean the profits which the directors consider should be distributed after making provision for depreciation or past losses, for reserves or for other purposes.
- Profit or a portion of the profit that can be legally distributed as a dividend to the shareholders is known as Divisible Profit.
- All profit of the company is not divisible and a number of factors should be considered while determining the divisible profit of the company.
Hence, profits available for the dividend to shareholders are known as divisible profits.
Can the dividend be declared out of the previous year’s profit transferred to reserve? (December 2008) (6 Marks)
Declaration of Dividend out of reserve [Second Proviso to Section 128(1)]:
If due to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall be made except in accordance with such rules as may be prescribed in this behalf.
As per Rule 3 of the Companies (Declaration & Payment of Dividend) Rules, 2014, in the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the following conditions:
1. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year.
This shall not apply to a company that has not declared any dividend in each of the preceding 3 financial years.
2. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
3. The amount is 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.
4. The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid-up share capital as appearing in the latest audited financial statement.
Write a short note on Punishment for failure to distribute dividend and exceptions. (June 2016) (4 marks)
1. Section 127 of Companies Act, 2013, provides that when a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of the 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 two years and
- with fine which shall not be less than one thousand rupees for every day during which such default continues.
The company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues
Proviso to section 127 has provided a list where no offence under this section shall be deemed to have been committed:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) 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 been communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.
Dividend can be paid out of capital if articles of association authorize such payment. Comment (December 2011) (5 marks)
Dividend can be paid out of capital if the Article of Association authorizes such payment. Comment (December 2012) (5 marks)
1. Section 51 of the Act, states that a company may if so authorized by its articles, pay a dividend in proportion to the amount paid upon each share.
2. After the declaration of dividend, the company has to pay the dividend within 30 days of the declaration of dividend.
3. The term “capital profits” may be defined to mean those profits which arise otherwise than in the normal course of the business and earned out of capital transactions. The usual sources of capital profits are:
- Profits on sale of fixed assets.
- Profits on revaluation of fixed assets
- Premium on issue of shares last/debentures/bonds
- Profits on the reissue of forfeited shares
- Capital redemption reserve account
- Profit prior to Incorporation.
The Act does not mention specifically whether capital profits le. profits which arise where a company sells part of its fixed assets at a price higher than the original cost of such asset can be distributed as dividend. However, in the two important cases Lubbock v. British Bank of South America (1892) 2Ch. 198 and Foster v.
The New Trinidad Lake Asphalt Co. Ltd. (1901) 1 Ch. 208, the courts have held that capital profits cannot be considered as available for distribution as a dividend unless:
(a) The AOA authorize such a distribution; and
(b) The surplus is realized and remains after a valuation of the whole of the assets and liabilities.
The Board of Directors of AVB limited wants to declare a dividend INR 15 lakhs out of capital profits for the year ended 31st March 2017, without making a provision for depreciation. Referring to the provisions of the Companies Act, 2013, you being the Secretary of the Company advise the board whether it can go ahead with its proposal? (June 2017) (4 marks)
1. Dividend cannot be paid out of capital, even if the Articles of Association authorize such payment.
2. Sources of Dividend [Section 123( 1) of Companies Act, 2013]: provides that the dividend shall be declared or paid by a company for any financial year only out of
(a) 1. the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2),
2. 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
3. out of both;
In computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any changes in carrying amount of an asset or of liability on measurement of the asset or the liability at fair values shall be excluded; and;
(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.
3. Dividend cannot be declared unless previous losses and depreciation are set off [Fourth proviso to Section 123(1)]:
No company shall declare dividend unless carried over previous losses and depreciation not provided in previous years are set off against profit of the Company for the current year.
Keeping in view the above provisions, AVB Limited cannot declare dividend out of capital. It can declare dividend out of current profit or out of profits for any previous financial years after providing for depreciation.
A resolution was passed by shareholders in an Annual General Meet¬ing approving the final dividend @ 20% for the financial year 2016-2017 and one month later the Board of Directors decided to pay further dividend @ 5% for the financial year 2016-2017. (December 2008) (5 marks)
- The Board of Director of Company recommends dividend and it is approved by the shareholder in the Annual General Meeting (AGM).
- The Shareholder can reduce the rate of dividend proposed by shareholder but cannot increase it.
- The Company can declare a dividend in an extraordinary general meeting (EOGM) if it could not declare a dividend in Annual General Meeting (AGM). [Department Circular No. 22 dated 25.9.1975]
- However, if the dividend is declared in the Annual General Meeting (AGM), it cannot be increased in subsequent EGM or board meeting.
Thus, the decision of directors to pay further dividend© 5% for the financial year 2016-2017 for which already dividend is declared @ 20% is invalid.
The board of directors of a company in the meeting held on 30th April 2015 declared an interim dividend. In another meeting held on 18th May 2015, the board of directors revoked the Interim Dividend declared without assigning any reason. Advise the company in the matter. (December 2013) (8 marks)
- A dividend when declared becomes a debt and a shareholder is entitled to sue for recovery of the same after the expiry of the period of 30 days prescribed under Section 124.
- As per Section 2(35), “dividend includes any interim dividend.”
- To sum up, a dividend including an interim dividend once declared becomes a debt and cannot be revoked, except with the consent of the shareholders. But where a dividend has been illegally declared, the directors will be justified in revoking the declared dividend. If an illegally declared dividend is paid then the directors shall be responsible, liable and accountable to the Company personally.
A Company for die the financial year 2014-2015 declared a dividend on 19th September 2015 but failed to pay the same within the prescribed time. A case was filed against the director in this regard. The director has contended that he has resigned before the declaration of dividend. Decide the fate of directors in the light of relevant provisions of the Companies Act, 2013. (December 2013) (4 marks)
- As per Section 124(1) of the Companies Act, 2013, a company has to pay a dividend within 30 days of declaration of dividend.
- Failure to pay or post dividend warrant within 30 days constitutes an offence and directors of the Company are liable to punishment as provided under Section 127.
- However, in N. Kumar v. M.O. Roy, Assistant Director, S.F.I.0 (2007) 80 SCL 55 (MAD), it was held that if the director has resigned before the declaration of dividend then he cannot be held liable for the default of non-payment of the dividend within 30 days of declaration of dividend as he may not be aware of the entire affairs of the Company after his resignation.
In Evergreen Limited, the Board of Directors declared an interim dividend but could not distribute the dividend due to objections of the audit committee that the accounts considered by the 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 directors contended that he never attended the board meeting where the issue related to payment of the interim dividend was declared on the basis of false accounts. Discuss the validity of the contention of the director. (December 2014) (4 marks)
- As per Section 124(1), a company has to pay a dividend within 30 days of the declaration of dividend.
- Failure to pay or post dividend warrant within 30 days constitutes an offence and directors of the Company are liable to punishment as provided under Section 127 of the Companies Act, 2013.
- A dividend including an interim dividend once declared becomes a debt and cannot be revoked, except with the consent of the shareholders.
But where a dividend has been illegally declared, the directors will be justified in revoking the declared dividend.
The Board of Directors of American Express Limited declared an interim dividend third time during the financial year 2015-2016. After declaration, the Board of Directors decided to revoke the third interim dividend as they noticed that company’s financial position did not permit payment of such interim dividend. The Board of Directors seeks your advice in this matter. Please advise the Board as a company secretary. Will your advice be different in case it was a regular dividend instead of an interim dividend? (December 2017) (4 marks)
- A dividend including an interim dividend once declared becomes a debt and cannot be revoked, except with the consent of the shareholders. But where a dividend has been illegally declared, the directors will be justi¬fied in revoking the declared dividend. If an illegally declared dividend is paid then the directors shall be responsible, liable and accountable to the Company personally.
- As per Section 2(35), “dividend includes any interim dividend.”
Thus, the Board of Directors of American Express Ltd. cannot revoke interim dividend even though the company’s financial position did not permit payment of such interim dividend.
The board of Directors of Peculiar Limited proposes to recommend a final dividend of INR 25 each to all the equity shareholders of the company. The company seeks your opinion on the following:
1. The company wants to deposit the dividend amount to Co-operative Bank.
Keeping in view the provisions of the Companies Act, 2013 advice to the Board of Directors of Peculiar Ltd. is as follows:
Section 123(4) of the Companies Act, 2013, provides that the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
2. The company is a defaulter in the repayment of deposits and proposes to repay its all deposit after the payment of the dividend within 10 days.
Section 123(6) of the Companies Act, 2013, provides that a company that fails to comply with the provisions of sections 73 (Prohibition of acceptance of deposits except in the manner provided) and 74 (Repayment of deposits etc accepted before commencement of Companies Act, 2013) shall not, so long as such failure continues, declare any dividend on its equity shares.
Thus, during the continuance of default in repayment of deposit the Peculiar Ltd. cannot declare a dividend. The Company is advised to make good the default of repayment of a deposit first and then to declare the dividend.
3. Dividend will be declared out of the capital reserves of the company.
The Act does not mention specifically whether capital profits le. profits which arise where a company sells part of its fixed assets at a price high¬er than the original cost of such asset can be distributed as dividend. However, in the two important cases Lubbock v. British Bank of South America (1892) 2Ch. 198 and Foster v.
The New Trinidad Lake Asphalt Co. Ltd. (1901) ICh. 208, the courts have held that capital profits cannot be considered as available for distribution as a dividend unless:
(a) The AOA authorize such a distribution; and
(b) The surplus is realized and remains after a valuation of the whole of the assets and liabilities.
4. The company wants to pay such dividend through the cash counter by
way of a cash voucher. (June 2018) (4 marks)
A Dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
Thus, Peculiar Ltd. cannot pay dividend through the cash counter by way of a cash voucher.
A company declared a dividend on 21st November 2018. It reports on 22nd December 2018 that it could not pay a dividend to 46 members as they are not traceable for the last three years. Advise the company with regard to an unpaid dividend under the provisions of the Companies Act, 2013. (December 2018) (3 marks)
- In accordance with the provisions of Section 124(1) of the Companies Act, 2013 after the declaration of dividend the company has to pay dividend within 30 days of declaration of dividend.
- If the amount of dividend remains unpaid or unclaimed for 30 days of dec¬laration of dividend, then in the next 7 days the company has to transfer the amount unclaimed to a special account in any scheduled bank to be called the “unpaid dividend account”.
- In the given case, a company declared a dividend on 21 st November 2018 and reported on 22nd December 2018 that it could not pay a dividend to 46 members as they are not traceable for the last three years.
Thus, the company is advised to transfer the amount payable as the dividend of 46 members to the “unpaid dividend account” in accordance with Section 124 of the act.
Referring to the provisions of the Companies Act, 2013, advise a public company that declared a dividend on 30th September 2018 as to the procedures to be followed in this regard for payment of dividend. Whether any intervening holidays in the month of October 2018 shall be taken into account in calculating the time limit? (June 2019) (3 marks)
The following steps are required to be taken by a company in respect of payment of final dividend only:
1. Holding of annual general meeting and Passing of an ordinary resolution declaring the payment of dividend to the shareholders of the company as per the recommendation of the Board;
2. The shareholders cannot declare the final dividend at a rate higher than the one recommended by the Board. However, they may declare the final dividend at a rate lower than the one recommended by the Board.
3. Open a separate bank account for making dividend payment and credit the said bank account with the total amount of dividend payable within five days of declaration of dividend.
4. Prepare two copies of the list of members with names and addresses only for mailing purposes-one to cut and paste on envelopes which could even be printed on self-sticking labels and the other for securing receipt from the Post Office.
5. Dispatch dividend warrants within thirty days of the declaration of dividend. In the case of joint shareholders, dispatch the dividend warrant to the first-named shareholder.
6. Publish a Company notice in a newspaper circulating in the district in which the registered office of the company is situated to the effect that dividend warrants have been posted and advising those members of the company who do not receive them within a period of fifteen days, to get in touch with the company for appropriate action (in the case of listed companies, as a good practice).
7. Issue bank drafts and/or cheques to those members who inform that they received the dividend warrants after the expiry of their currency period or their dividend warrants were lost in transit after satisfying that the same has not been encashed.
8. Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid dividend A/c”. Within 7 days after expiry of the period of 30 days of declaration of the final dividend.
Further, As per Secretarial Standard- 3 the dividend shall be deposited in a separate bank account within 5 days from the date of declaration and shall be paid within 30 days of declaration. The intervening holidays, if any, falling during such period shall be included.
Note: The above step is for payment of dividend. It is assumed that the steps regarding declaration of dividend are already complied with.