Symbiosis Law School, Pune

Subject: Company Law I

(SEM V) Batch 2017-22 B.A.LL.B(Hons)

SUBMITTED BY: -
NAME:- Vipin Kumar Gautam

DIV: -17010125146

COURSE: - B.A. LL.B(Hons)

DIV- B
 I. Discuss the provision relating to ‘dividends’ under Companies Act 2013.

The word "dividend" has origin from the Latin word “dividendum”. It means a thing to be
divided. Every investor is aware that dividend is nothing but profits earned by the company
and divided amongst the shareholders in proportion to the amount paid up shares held by
them. Simply stated it is a return on investment made by the shareholders. Dividend is paid
by a company to its shareholders on a particular date (book closure date) either out of profits
or out of reserves. A company may, if so authorised by its Articles of association, pay
dividends in proportion to the amount paid-up on each share. Declaration of dividend is
usually one of the items of the Agenda of every annual general meeting when directors
recommend dividend.

Definition of dividend:

As per definition u/s 2 (35) of the New Act dividend includes any interim dividend.

Provisions relating to payment of dividend:

1. Deprecation must be provided:

Companies cannot declare or pay dividend for any financial year unless it is paid - 
Out of profits for that year arrived at after providing depreciation in accordance with
provisions sub section 2 of Section123  or -  Out of accumulated profits of the
company for any previous financial year or years arrived at after providing
depreciation and remaining undistributed  or -  Out of both above or -   Out of money
provided by the central government or a state government for payment of  dividend 
in pursuance of a guarantee given by that government Readers may note that similar
provisions exist in Old Act also

2. Transfer to Reserves for declaration of dividend:

A company may, before declaration of any dividend transfer such percentage of its
profits for that financial year as it may consider appropriate. The Board of directors is
given freedom to decide the percentage of transfer of profits to reserves before
declaring a dividend {First proviso to section 123(1)}. The compulsory transfer to
reserves enables companies to pay dividend out of accumulated profits when profits
are lean and a consistency in the rate of dividend can be maintained. Some companies
are known for their distributing high dividends and some are known for issuing bonus
shares and thus preventing cash out flow.
3. Declaration of dividend out of accumulated profits:
Second proviso stipulates that in case of 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 to the reserves, such declaration
 of dividend shall not be made except in accordance with such rules as may be
prescribed in this behalf.

Essence of Rules:
As per Rule no.8.1, the very first condition is that 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. Further it requires that the amount to be
utilised from reserves shall not exceed 1/10th of total paid up capital and reserves. 
After drawing reserves for dividend, the balance reserves shall not fall below 15% of
its paid up capital. Dividend can be declared only after loss or depreciation in the
previous years whichever is less is provided {Rule no.8.2}
The third proviso stipulates that no dividend shall be declared or paid by a company
from its reserves other than free reserves.

The word” Free reserves” has been defined by Section 2(43) of New Act  to mean
such reserves which, as per the latest audited balance sheet of a company, are
available for distribution as dividend. However, the following shall not be treated as
free reserves:
- any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
-  any change in carrying amount of an asset or of a liability recognised in equity,
including surplus in profit and loss account on measurement of the asset or the
liability at fair value, shall not be treated as free reserves;

4. Manner of depreciation:
Sub section 2 of 123 clarifies that for the purposes of clause (a) of sub-section (1),
depreciation must be provided in accordance with the provisions of Schedule II.

5. Interim dividend:
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. 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.
{Section 123(3)}. This restriction ensures financial prudence.

6. Time limit for deposit of dividend:

The amount of the dividend, including interim dividend, must be deposited in a
scheduled bank in a separate account within five days from the date of declaration of
such dividend. Dividend once declared by the shareholders becomes a debt and
payable unlike in the case of interim. But the restriction to deposit within 5 days of
declaration even the interim also ensures that the Board cannot go back on the
commitment made by its declaration. {Section 123(4)}

7. Dividend to be paid to registered shareholders:

No dividend shall be paid by a company in respect of any share therein except to the
registered shareholder of such share or to his order or to his banker and shall not be
payable except in cash. Proviso however clarifies that capitalization of profits or
 reserves of a company for the purpose of issuing fully paid-up bonus shares or paying
up any amount is permissible. {Section 123(5)}.

8. Mode of payment of dividend:

Any 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.

9. Prohibition on payment of dividend:

If a company violates 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. In the old Act, there is prohibition for payment of dividend, if
violation of Section 80-A (redemption of preference shares within stipulated time)
continues. {Section 123(6)}

Punishment for failure to distribute Dividend: {Section 127}

This section corresponds to section 207 of the Old Act and states that where dividend
has been declared but not paid or warrants have not been posted within 30 days of
declaration, every director who is knowingly a party to the default shall be punishable
with imprisonment up to 2 years and with a fine of one thousand for every day during
which the default continues and company shall be liable to pay simple interest @18%
p.a. However, immunity can be claimed from the punishment, if the default in
payment is due to operation of any law, dispute about the claim, incorrect mandate.

Conclusion:
With the removal of restriction on mandatory transfer of minimum amount of current
profits to reserves and allowing payment of dividend out of reserves with some
conditions, shareholders can expect good and consistent dividend pay outs from the
listed companies. Companies which reward their shareholders with consistent
dividend pay outs will be favoured by investors. Dividend pay-out is also an
indication of the growth and financial health of the company.
 II. Critically evaluate the concept of ‘Separate Legal Personality and discuss the
exceptions
to the concept.

A company is an artificial legal person and comes into existence when it is given a certificate
of incorporation by the ROC (in case of private companies) or when it registers itself with the
ROC (in case of public companies).

I. Separate Legal Existence:

A company has a separate legal existence which is created by the process of law. 

1. 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.
2. 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. 
3. Further, the assets and liabilities of the company are not the same as the assets and
liabilities of its members. 
4. Investments and borrowings are made by the directors in the name of the
company. 
5. Members only act as representatives of the company acting in the best interests of
the company. 

II. Perpetual Succession:

 1. The company has perpetual succession that is to say that a company goes on to
live forever. 
2. The death, insolvency, unsoundness of the members of a company shall not affect
the life of the company
3. Even if the members of the company change from time to time, the company will
continue to exist as it is. 

III.  It can sue and be sued:

1. The company being a juristic person can sue and be sued in its own name. 
2. However, no insolvency proceedings can be filed against the company. Under S. 8
of the Provisional Insolvency Act of 1920, it is expressly stated that no insolvency
proceedings shall be presented against a company.

IV. It has its Separate Property:

1. A company has the right to own, enjoy and dispose off any property without giving
any specific rights to the shareholders in such property.
2. The property acquired shall be in the name of the company as it is a separate legal
entity and can acquire property for itself.
3. The property of the company is separate from the property of its members and
therefore a member/shareholder cannot be said to be a part owner of such property. 
4. The company can mortgage, sell and lease etc. its property.

V. Limited Liability of its Members:

1. The debts of the company have to be paid by the company itself and in case of a
company limited by shares, the liability of the members is limited to extent of the
nominal value of shares owned by them.
2. It is advantageous in 2 aspects:
i. It attracts more and more members
ii. It will lead to formation of an enlarged capital and thus expansion of the business.
  

2.2 Doctrine of Lifting of Corporate Veil:

1. In applying the doctrine of lifting of the corporate veil, the court ignores the concept of
corporate personality, in the interest of justice. 
2. The company thus is not viewed as a separate legal entity so as to understand the real
affairs of the company. 
3. The theory of corporate personality may be misused for certain illegal or unlawful
purposes like committing fraud or evasion of tax and there are certain cases wherein the
corporate veil must be lifted. 
4. It is used only in exceptional cases and power is conferred on the Courts to decide the
real internal affairs of the company. 
 5. This doctrine has been mentioned expressly through both judicial pronouncements as
well as statutory provisions which state situations in which the doctrine may be applied
and corporate personality is completely ignored. 
6. It is connected with the bracket theory and states that corporations don’t have a mind or
will of their own. Nevertheless, the bracket may be opened to find out which natural
persons will be liable in case of any wrong. Then again this matter is largely in the
discretion of the courts and will depend on the underlying social, economic and moral
factors as they operate in and through the corporation.

Exceptions to the concept of Separate Legal Personality:

 When the cloak of corporate personality is used for circumventing tax obligations or to
evade tax or to avoid welfare legislations

1. This was upheld in the landmark case of State of UP v. Renu Sagar Power Co., the
subsidiary (defendant) was used by the holding company HINDALCO for the purpose of
generation of power and providing the same to the holding company. The court held
herein that duty for power generation should be levied on the holding company and both
the holding and subsidiary companies must be treated as one for the subsidiary was
wholly owned by the holding company. This was done with the prime objective to evade
tax. Thus, the corporate veil was pierced and exemption from tax was not granted.
2.  A similar case would be that of ENRON which with the help of several subsidiaries tried
to hide debts and avoid taxes.

 For the protection of revenue

1. Tax planning will be legitimate if done within the framework of the law and hence
colourable devices cannot be used as a part of tax planning. 
2. In the landmark case of Dinshaw Manakjee Petit, Re, Dinshaw was an assesse who
was receiving a huge interest and dividend income and thus transferred it toward an
investment to 4 private companies formed for the purposes of reducing tax liability.
These for companies transferred the money to Dinshaw as a loan. The court held that
the companies formed by Dinshaw were simply a device to protect one’s revenue and
avoid taxes. 

 When the company wants to avoid any legal obligation

1. The courts will refuse to uphold the separate existence of the company where it is
formed to circumvent law, defraud creditors or to avoid legal obligations.
2.  In PNB Finance v. Shital Pd Jain, a person borrowed money from a company and
invested it in shares of three different companies in all of which he and his son were
the only members. Herein, the lending company was allowed to attach the assets of
such companies as they were created solely to hoodwink the lending company.

 When the instrument of corporate personality is used for the purposes of fraud
 1. Where the machinery of the company is used for fraudulent purposes, for example,
defrauding the creditors, circumventing tax, the court can lift the corporate veil. 
2. It has assisted courts to unravel the real persons behind corporate wrongs and
misgivings as can be seen from the ENRON, WORLDCOM and Satyam cases. 
3. It has enabled them to protect the interests of various stakeholders in the company
who would otherwise be continued to be defrauded had the corporate personality
been allowed to prevail. 

Conclusion:

Is it practically possible for the judiciary to pierce the corporate veil at all times and
expose the real actors behind the company? 

The fact remains that the bigger the company, the more difficult it is to pinpoint as to who
exactly should be made responsible for any wrong committed. 

Piercing the corporate veil typically is most effective with smaller privately held business
entities in which the corporation has a small number of shareholders, limited assets, and
recognition of separateness of the corporation from its shareholders would promote fraud or
an inequitable result. 

In fact, there is little or rather no record of a successful piercing of the corporate veil for a
publicly traded corporation because of the large number of shareholders and the extensive
mandatory filings entailed in qualifying for listing on an exchange. Hence, there must be a
balance between the two concepts. 

The courts must ideally maintain the fiction of corporate personality. Piercing the corporate
veil must be resorted to only in exceptional cases wherein there exist such grave
circumstances as warrant intervention by the court, namely when the interests of stakeholders
are threatened

Thus, the courts must exercise their discretion cautiously and follow the general rule of
corporate personality at most times.