Dividends

◦ CA 2016 ; Distribution instead of dividend

◦ CA 1965;Dividends may only be paid from profits

or pursuant to sec 60(which related to share
premium account)
 Who authorise

◦ Sec 132(1)
Company makes a distribution to shareholders after the
directors authorized the distribution

CA 2016 – no shareholders’ approval unless provided

otherwise in the constitution
CA 1965 – Table A ; requires shareholders’ approval
 Types of dividend
i) Final Dividend – end of financial year
(normally announce after AGM)
ii) Interim Dividend –between financial year,
before full year earnings
BMLR – paid not later than 3 months after
declaration. Non payment – consider as debt
(Debt arises when the time fixed for payment arrives.)
 Form of dividend
◦ Sec 132(2) - ..director authorised distribution at such
time in such amount
◦ No mention about form(method) of dividend
◦ Cash; can be in form of shares if stated in the
constitution

◦ Public listed companies (Plc) can have dividends

reinvestment plan after obtaining shareholders
approval (BMLR).
◦ Shareholders in Plc can choose to participate in the
plan or to have dividend in cash.
When dividend can be authorised

◦ Sec 132(2)
Directors may authorize a distribution & in such
amount as the directors consider appropriate, if the
directors satisfied that the company will be solvent
after the distribution is made
◦ Sec 131
Distribution-out of profits of the company available if
the company is solvent.

Case: Hilton International(1988)4 NZCLC

◦ Sec 132(3)
Solvent-company is able to pay its debts as and when
the debts become due within 12 months immediately
after the distribution is made
Trading Solvency Test - company has available fund
to settle creditors demand

Balance Sheet Solvency Test

Company’s assets is more than its liabilities; more
income than expenses by referring to company’s
financial statement
◦ Dividend from profits arising out of revaluation of existing assets
Common law - allow if company’s assets more than liabilities, did
not affect company ability to pay its debt and revaluation made in
good faith
◦ Dividend out of proceed from sales of its assets
Common law – allow if assets more than liabilities

◦ Under CA sec 132(3) - allow if company is able to pay its debt as

it fall due within 12 month after distribution is made
Sec 132(4)
If , after distribution is authorised, the director
ceased to be satisfied on reasonable ground that
the company will be solvent…., the directors shall
take all necessary steps to prevent the distribution
from being made
 Case laws

◦ Hilton International
- No dividend may be paid if the company is insolvent or
will become insolvent due to payment of dividend
HI controlled by 2 directors(majority shareholders);
borrowed from co. Later co faces financial difficulties-
claim from all debtors.
Directors recommend payment of dividend and
approved. Then co wound up. Liquidator sues directors
to recover dividend paid to them because company
have no available profits.
Held: No dividend maybe paid out of capital or income
profits if the company in the state of trading insolvency
or balance sheet insolvency
◦ Chip Thye Enterprise Pty Ltd
Financial reports – current liabilities exceeded its current assets; net
deficiency in balance sheet
Auditors report-doubt company able to continue without fresh
capital
Management accounts – no sales for 1999- 2001
H: These showed company was insolvent & has no available profit
when dividend was declared. Thus in breach of the provision.

NOTE:In this cases– the court mention about either trading insolvency
or balance sheet insolvency.
Companies Act 2016 only refer to trading solvency
◦ Industrial Equity Ltd v Blackburn
Holding company cannot declare dividend based
on profits of the subsidiary
Subsidiary of IE – made profit & intended to
declare dividend. Based on this expectation, IE
declared dividend to its shareholders.
IE can only declare dividend when the profits are
accrued.

◦ In re Given’s Estate
Cannot be declared in anticipation of profits
Effect of Contravention

◦ Sec 132(5)
every director or officer who permitted the
payment of improper/unlawful distribution would be
liable to imprisonment or fine

◦ Sec 133(2)
Director or manager permits/knows dividend is not
of profit maybe liable to compensate the company
 Effect- shareholders

◦ Sec 133(1) Company may recover amount of

distribution which exceeds the value from the
shareholders;
Unless the shareholders;
# received the distribution in good faith &
#has no knowledge that the company did not satisfy
the solvency test
◦ Sec 133(3) - ….any other person (may include the
shareholders)
◦ Dato Gan Ah Tee
F: The directors recommended payment of dividend
though there was no profit.There was an arbitration
award against the company & was disclosed in the
financial account. (directors knew that payment was
not out of profit and shareholders have knowledge
about it).

H: Company did not have profit & was not justified to

pay dividend
Re Exchange Banking Co (1882) 21CH 519
Directors had misled the shareholders that company had been
making profits.
Shareholders approved the declaration of dividends.
Held: The liquidator can recover the amount wrongfully paid out
from the directors.

It’s A Wrap (UK) Ltd in Liq v Gula [2006] EWCA Civ 544

- In relation to repayment of dividends… recovery if the

shareholders “ knew of the irregularity of the distribution… or could
not in view of the circumstances have been unaware of it”