COMPANY LAW

INTERNAL BACKLOG SUBMISSION

Sudev Singh
B.A LLB
Division B
17010125169
1. Discuss the provision relating to ‘dividends’ under Companies Act 2013.

Ans. The profits available for the distribution among the shareholders of a company as dividend
are called divisible profits. The profits are calculated by comparing the income and expense of
one year.

1. The necessary adjustments are made before calculating the profit of a business concern.
The directors have the right to create provisions, reserves and funds out of business
profits.

2. The remaining profit may not be used in full for dividend. A part of such profit can be
used to pay dividend to the shareholders. Keeping in view business conditions, the
directors can propose the rate of dividend. The shareholders can approve such rate of
dividend in annual general meeting. The rate of dividend proposed by the directors cannot
be increased by the shareholders at all. The proposed dividend is paid within 45 days after
the declaration of it.

3. It is thus clear that divisible profits are profits available for shareholders in the shape of
dividend.

1.1 Payment of Dividend

1.1.1 Sources of Dividend

1.1.2 Provision for Depreciation

1.1.3 Declaration and payment of dividends

1. There are various sources out of which dividend may be paid. They are as follows:

i. Profits of the current financial year

ii. Undistributed profits of the previous financial year

iii. Money provided by the Government in pursuance of a guarantee given by it

iv. Unpaid Dividend account

2. It is the share of profits which falls to each individual member of the company.
 3. According to S. 93, a company may if authorised by the articles, pay dividend in
proportion to the amount of paid-up share capital where larger amounts are paid up on
some shares than others.

4. Dividends can never be paid out of capital and is always paid out of profits. If paid out of
capital it would amount to breach of trust and the directors will be liable to such extent
used.

5. Section 205 states that dividend is paid out of profits in a financial year, the dividend will
vary from time to time depending on the balance Sheet and the P&L a/c.

6. However, there is an exception to this, when the central or state government has
guaranteed dividend, the same may be paid out of the money provided by the concerned
government.

Further, S. 205 states that the following amounts should be deducted from the profits available
in the financial year and the rest shall be used for payment of dividend:

i. Any depreciation in the current year.

ii. Any depreciation that has not been provided for in the previous financial year.

iii. Any loss incurred by the company in the previous year.

7. Depreciation is a notional amount which is reduced from the value of the asset due to
time elapsed, improvement in technology, wear and tear of the asset etc. if depreciation is
not provided for, there will be the following consequences:

i. Value of the asset will be overstated in the balance sheet

ii. Value of the profits in the current year shall be overstated.

8. Section 207 states that dividend should be paid within 42 days of declaration of such
dividend. If it is paid by cheque, it should be posted within 42 days. If not paid, then
every officer in default shall be liable to 7 days imprisonment or fine or both.

9. There are some exceptional cases wherein dividend need not be paid in the time
prescribed u/s 207. These are:

i. When the shareholder gives the company certain directions regarding the payment
of dividend and these cannot be complied with.
 ii. When the dividend could not be paid due to the operation of law.

iii. Where there is a dispute regarding the right to receive dividend.

iv. When the dividend is lawfully adjusted to a sum owed by the shareholder to the
company.

10. Section 205 A (amendment of 2000) states that unpaid dividend should be transferred to a
special dividend account.

i. Where, a dividend has been declared by a company but has not been paid, within
thirty days from the date of the declaration, to any shareholder entitled to the
payment of the dividend,

ii. The company shall, within seven days from the date of expiry of the period of
thirty days, transfer the total amount of dividend which remains unpaid within the
period of thirty days, to a special account to be opened by the company in that
behalf in any scheduled bank, to be called "Unpaid Dividend Account"

11. Who can declare dividend?

i. BOD recommends the rate at which dividend should be paid. The AGM declares
the dividend at the rate decided by the BOD.

ii. The AGM may reject the declaration of dividend. It cannot be increased beyond
the rate recommended by the BOD.

iii. The rates can only be declared by the BOD which is considered as the final rate.

iv. After declaration, the dividend becomes a debt due from the company to the
shareholder, whose dividend is paid within 30 days, else transferred to the Unpaid
Dividend A/C.

Critically evaluate the concept of ‘Separate Legal Personality and discuss the exceptions

to the concept.

1. A company has a separate legal existence which is created by the process of law.
2. The same is dealt with in S. 3(1) and S. 34(2) of the Act and must be read together to
completely understand the captioned concept.
3. S. 3(1) defined company as an association of persons formed and registered under the
Companies Act, 1956. Thus a company is said to have come into existence on receipt
of a certificate of incorporation from the ROC. Thus distinct from its members.
4. S. 34 (2) further goes on to say that on incorporation a company becomes a body
corporate i.e. it can sue and be sued, has its common seal, a separate legal personality
distinct from its members and has perpetual succession.
5. Further, the assets and liabilities of the company are not the same as the assets and
liabilities of its members.
6. Investments and borrowings are made by the directors in the name of the company.
7. Members only act as representatives of the company acting in the best interests of the
company.
8. This feature of independent corporate personality is illustrated in the case of Solomon
v. Solomon Company Ltd.

FACTS:
i. The plaintiff, Aaron Solomon (P), was a leather and shoe manufacturer and he
converted his business into a company and named the company Solomon
Company Ltd. The Company was limited by shares and had a share capital of
£40,000 (£1*40000 shares).
ii. There were 7 subscribers to the memorandum (Solomon, his wife, daughter
and 4 sons) who were to run the business. When he transferred the business
Solomon took 20,000 shares of £1 each and debentures worth £10,000. His
wife, daughter and 4 sons had 1 share of £1 each.
iii. There was trade depression and a year after incorporation the company went
into liquidation, there were assets worth £6,000 and liabilities consisting of
unsecured creditors £7,000 and debentures held by Solomon worth £10,000.
iv. Thus, the unsecured creditors did not receive anything as all the money went
to the debenture holders.
v. The unsecured creditors raised the contention that the company was
incorporated but the company did not have a separate legal existence as
Solomon himself ran the company. The company was thus considered to be a
sham playing fraud and also contravened the intent of the company and its
object of the Companies Act.
HELD:
i. This contention by the unsecured creditors was rejected completely by the
courts. They held that on the incorporation of the company under the
Companies Act, the company has a separate legal existence.
ii. Thus even though the debenture holder was Solomon himself, he was entitled
to get priority in payment over the unsecured creditors of the company.
 iii. Thus is can be seen that the courts applied S. 3(1) and S. 34(2) of the Act.

9. In India, this concept of separate legal personality was recognised in the case of Re
Kondali Tea Company Limited
FACTS:
i. An association was running a tea estate and converted the same into a
company.
ii. They claimed an exemption from ad valorem duty on the ground that they
themselves were the shareholders of the company and there was a transfer of
one company to another.
HELD:
i. The court that even if one person holds the entire share capital of the
company, it is a legal personality distinct from its members.
ii. Further, the court stated that the shareholders are persons who participate in
meetings and all the assets of the company are to be transferred to him on
liquidation. The main object of the companies act is to protect investors and
creditors of a company.

10. In another case, Lee v. Lee Air Farming Ltd. the concept of independent legal
personality was upheld.
FACTS
i. A managing director of the company appointed himself as a pilot. While
piloting an aircraft, he died.
ii. His wife went on to claim compensation under the Workmen’s Compensation
Act.
HELD
i. The Managing Director was acting in the twin capacity i.e. the master (MD)
and servant (pilot) of the company.
ii. The principle of corporate personality allows one person to act in a twin
capacity and thus his wife could claim compensation under the scheme as he
was acting in the capacity of a servant of the company and could claim such
compensation.

11. The J.J. Irani Committee Report too mentions the same and the doctrine of lifting the
corporate veil has not been touched by them.