Dividends are the distribution of a company’s profits to its shareholders. The shareholders are the owners of the company and they subscribed to the shares of the company. Dividends can only be paid if the company has profits. Paying dividends when a company has no profits is illegal. If a director of a company approves the payment of dividends when the company is unprofitable, he will be guilty of a criminal offence under section 403(2) of the Companies Act and is liable to a fine of up to $5,000 and 12 months jail. The director will also be liable to the company’s creditors for the amount of debts owed up to the amount of dividends paid which exceeded the available profit. The director may be required to replace the monies that were wrongfully paid out. In this case, the shareholders are not liable to return the dividends that were wrongfully paid out to them. Once a company has entered into a liquidation process, dividends cannot be paid.
It is important to understand what can be determined as profits.
1) Profits are determined as the profits of the company and not the profits of a group if the company is part of a group. If the group is profitable as a whole but the company is not, then dividends for that company cannot be paid.
2) Past year profits that were carried forward can be paid out as dividends.
3) Capital appreciation is part of profits and dividends may be paid out of capital gains realised on the sale of assets. The capital must remain intact and the value above that can be paid out.
4) Profits do not include capital depreciation.
5) The company’s constitution may spell out what can and cannot be paid out as dividends.
6) Profits need to be available on the date that the dividends are declared. It does not need to be available at the time dividends are paid.
7) Dividends are paid after tax.
The directors of the company are the ones who will declare dividends. Usually, dividends are declared at the Annual General Meeting (AGM) of the company and this is called final dividends. Once dividends are declared and approved by the shareholders, it forms a debt and it has to be paid immediately unless it was stated to be paid at a later date.
Dividends can be declared outside of an AGM as well. The directors may declare an interim dividend. However, unlike a final dividend, the interim dividend is not a debt and companies do not have to honour payment of interim dividends.
The shareholders are not entitled to dividends unless it is specified in the company’s constitution. The shareholders cannot pressure the directors to declare dividends.
Even though there is no requirement for a company to pay dividends to its shareholders, paying dividends helps to keep shareholders happy and remunerates them for their investment in the company.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at ACRA Filing Agent.
For more useful articles and videos, visit the ACRA Filing Agent useful Articles page.
If you would like to submit a question or would like us to do an article on certain topics, please email us at [email protected].