Company Law-II

Module IV: Corporate Accountability: Divisible Profits and Dividends

Module IV: Topics to be Covered

Definition and Meaning and Types of Dividend; Ascertainment of Divisible Profits and Dividends; Declaration and Payment of Dividend; Unpaid and Unclaimed Dividend and Investors Education and Protection Fund; Payment of Dividend out of Capital; Payment of Dividend out of Capital Profits.

DIVIDEND: MEANING

CIT v. Girdhar Das & Co. (P.) Ltd. [1967] 21 Comp. Cas. 932

As applied to a company which is a going concern, it ordinarily means the portion of the profits of the company which is allocated to the holders of the shares in the company.

In the case of winding-up , it means a division of the realised assets among the creditors and contributors according to their respective rights.

The Companies (Amendment) Act, 2000

Sub-Section (14A) of Section 2: The term dividend includes any interim dividend.

The Companies Bill, 2011 also retains the similar definition:

Section 2 (35) of the proposed bill defines it as: dividend includes any interim dividend.

Types of Dividends:
Dividend

Final Dividend: Dividend for a financial year of the company are payable only if they are declared by the company at its annual general meeting on the recommendation of the directors.

Interim Dividend: Sometimes dividends are also paid by the directors themselves between two annual general meetings without declaring them at an annual general meeting.

Divisible Profits:

Divisible Profits: Meaning

Profits Distributed (Legally) Shareholders

(in form of dividends)

Divisible Profits

Buenos Ayres Great Southern Rly. Co., In re [1947] Ch. 384

Divisible profits were described to mean the profits which the directors consider should be distributed

after making provision for past losses, reserves and

for other purposes.

Sources Out of which dividend may be paid

Sources Out of which dividend may be paid

1. Out of current Profits
2. Past reserves created out of profits or credit balance in the profit and loss account brought forward

3. Out of the money provided by the Government.

Sources Out of which dividend may be paid

1. OUT OF CURRENT PROFITS

1. Out of current profits (Section 205):

Dividends
(current year)

declared

out of the profits

after providing for depreciation.

Proviso (c) to Section 205 (1)

Application for exemption should be made to government in e-form 23 AAC.

Compulsory transfer of profits to reserves [Section 205 (2A)]

According to the Companies (Transfer of Profits to Reserves) Rules, 1975
If dividend Proposed is Up to 10% 10% to 12.50% 12.51% to 15% 15.01% to 20% Over 20% % of Current profits Nil 2.5% 5% 7.5% 10%

Sources Out of which dividend may be paid

2. OUT OF PAST RESERVES

Out of past reserves:

Section 205 A (3) inserted by the Companies (Amendment) Act, 1974

Central Government framed: The Companies (Declaration of Dividend out of Reserves) Rules, 1975

The Companies (Declaration of Dividend out of Reserves) Rules, 1975 provides: In the event of absence/ inadequacy of profits in a year, dividends may be declared fulfilling the following conditions:
A. The rate of the dividend declared does not exceed The average of the rates at which dividend was declared by it in the 5 years immediately preceding that year, or Whichever is less 10 % of its paidup capital

B. The total amount to be drawn from the accumulated profits earned in the previous year

And transferred to the reserves

Does not exceed an amount

Equal to 1/10th the sum of its paid-up capital

The amount so drawn must first be utilised to set off the losses incurred in the financial year

Before any dividend is declared

C.
The balance of
reserves after

Such drawal

Does not fall below

15% of its paidup share capital

Sources Out of which dividend may be paid

3. MONIES PROVIDED BY GOVERNMENT

3. Monies provided by Government

A company can also declare dividend out of the monies provided by the Central or a State Government

For payment of such dividend

In pursuance of a guarantee given by that Government

Unpaid and Unclaimed Dividends

Unpaid and Unclaimed Dividends

Where, after the commencement of the Companies (Amendment) Act, 1974, a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration, to any shareholder entitled to the payment of the dividend,

the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed within the said period of thirty days,

to a special account to be opened by the company in that behalf in any bank, to be called Unpaid Dividend Account of ............ Company Limited/Company (Private) Limited.

Transfer of unpaid dividend to Investor Education and Protection Fund [IEPF] Section 205 A (5)
Any money transferred to the unpaid dividend account of a company (in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer)

shall be transferred by the company to the Fund established under sub-section (1) of Section 205C.

The company shall be entitled to

a receipt from the authority or committee under subsection (4) of Section 205 C

for any money transferred by it to the Fund

and such a receipt shall be an effectual discharge of the company in respect thereof.

Payment of unpaid or unclaimed dividend [Section 205 B]

No claim shall lie against the Fund or the company in respect individual amounts (which were unclaimed or unpaid for a period of 7 days from the dates they first became due for payment) and no payment shall be made in respect of such claims [explanation to sub-section (2) of Section 205 C]

Penalty
If a company fails: Then: The company and every officer of the company who is in default: Punishable with a fine which may extend to rupees 5ooo for every day.

Investor Education and Protection Fund

Objectives/ activities of the Fund:

Educating investors about market operations

Making investors aware about market volatilities

Empowering the investors by making them aware of their rights and responsibilities under various laws Continuously disseminating information about unscrupulous elements and unfair practices in securities market and Broadening the investors base by encouraging new investors to participate in securities market Promoting research and investor surveys to create a knowledge base that facilitate informed policy decisions.

Investor Education and Protection Fund

(a) Unpaid dividend accounts of the companies; (b) The application moneys received and due for refund; (c) Matured deposits; (d) The interest accrued on the amounts referred to in clauses (a) to (d); (e) matured debentures; (f) Grants and donations by the Central Govt., State Govt., companies or any other institutions ; (g) The interest or other income received out of the investments made from the Fund.

The fund utilised promotion of investor awareness and protection of the interests of investors The Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001

These Rules, inter alia, contain provisions relating to:

constitution

and functions of the Committee, activities relating to investors education, awareness and protection to be undertaken with the recommendation of the Committee, conditions for utilisation of Funds by the Committee, proforma for applications for registration of associations, institutions or organisations and also for seeking financial assistance under IEPF, etc.

Brief of Main Committee

Pursuant to Section 205C(4) read with Rule 7 of the IEPF Rules 2001, the Central Government has constituted a Committee. Secretary, Department of Company Affairs is Chairman of the Committee. The members are representatives of Reserve Bank of India, Securities Exchange Board of India, and experts from the field of investors education and protection. The non-official members of the Committee hold office for a period of two years. The official members hold office for a period of two years or until they occupy their position whichever is earlier.

Functions of the Main Committee

Education

Programmes through Media; Organizing Seminars and Symposia; Proposals for registration of Voluntary Associations or Institution or other Organizations engaged in Investor Education and Protection activities; Proposals for projects for Investors Education and Protection including research activities and proposals for financing such projects; Coordinating with institutions engaged in Investor Education, awareness and protection activities;

The Committee may appoint one or more SubCommittees whenever it considers necessary to facilitate efficient and speedy discharge of its functions.

Sub-Committee shall be constituted from amongst the members. The Chairperson of the Committee may nominate any one of the members of the Sub-Committee as its convenor and where no such nomination has been made, the members of the Sub-Committee elect a convenor amongst themselves. The Committee may have Sub-Committee to examine the end use of grants and assistance and recommend release of funds.

Payment of dividend out of capital

Payment of dividend out of capital

In Verner v. General & Commercial Investment Trust Ltd. [1894] 2 Ch. 239: Dividends are not allowed to be declared out of capital. If the memorandum or article give power to the company to pay dividends out of capital, such a power shall be invalid.

Consequences of payment of dividend out of capital

Directors who knowingly paid dividends out of capital shall be personally held liable to make good the amount to the company (Oxford Benefit Building & Investment Society, In re [1886] 35 Ch. D.). 2. If the members who received dividends know that they have been paid out of the capital, the directors may have a right of indemnity against such members to the extend that they have respectively received dividends. {Moxham v. Grant [1900] 1 QB 88 (CA)}
1.

Consequences of payment of dividend out of capital

3. Where an interim dividend has been paid out of capital owing to a bonafide mistake and the director proposed to recoup such dividend out of profits before distributing any further dividends, a member who has received such dividends cannot maintain an action against the directors (Towers v. African Tug Co. [1904] 1 Ch. 558). 4. When dividends improperly paid out of capital have been made good out of subsequent profits, liability ceases to attach to the directors.