403. Dividends payable from profits only Flashcards

You may prefer our related Brainscape-certified flashcards:
1
Q
  1. Dividends payable from profits only
A

General overview
[403.01] The rule on maintenance of capital laid down in Trevor v Whitworth (1887) 12 App Cas 409, HL may be breached through a declaration of dividends payable out of the capital of the company. Hence, s 403 provides for the rules on the declaration and payment of dividends by a company to its members.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Out of profits

Can only pay out of profits , profits not define by CA but co reg can define it

A

[403.02] Section 403(1) provides that no dividend shall be payable to the shareholders of any company except out of profits. There is no definition of the word “profits” and hence, case law and the practice of the accounting rules will cast some light on the meaning of “profits”. However, the articles or regulations may define what are “profits” for dividend purposes, e.g. “business profits”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Profits
(Means profits available at time of div declaration not time of payment , can show paper profits n borrow to pay div but not commercially prudent , profits must come from co not the group)

A

[403.03] Profits need only be available at the time that the dividends are declared, not at the time of payment: Marra Developments Ltd v BW Rofe Pty Ltd (1977) 3 ACLR 185, SC. “Profits” is not cash, and is determined by the rules of accounting. Legally speaking, a company may show “paper profits”, be cash-short and borrow to pay the dividends, although this is not commercially prudent at all. A loan of money on a specific condition such as to pay the dividends declared by the directors, and paid into a designated account, created a trust attaching to it throughout in the hands of the company, independently of the latter’s contractual obligation, to repay the money if the condition failed: Quistclose Investments Ltd v Rolls Razor Ltd (in liquidation) & Anor [1968] 1 Ch 540, CA , affirmed by the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 . The “profits” available must come from the company and not from the group of which the company is part of: Industrial Ltd v Blackburn (1977) 3 ACLR 89, HC. So long as the company makes a profit on the revenue account, the original capital subscribed by the members that has been lost need not be replaced before a dividend can be declared

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Accretion in capital

A

[403.04] A dividend may be declared out of an accretion or appreciation to the capital of the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Unrealised profits

Can use unrealised profits for div

A

[403.05] A surplus created by a revaluation of assets of the company might legitimately be considered as unrealised profits and distributed as dividends: Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch 353, HC ; Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266, CA ; cf Westburn Sugar Refineries Ltd v Inland Revenue Commissioners (1960) 39 TC 45 , Court of Session. For the treatment of unrealised profits under the accounting rules, Singapore Financial Reporting Standards, see Tan Chong Huat, Tan Lay Hong, Ch’ng Li Ling, Law and Practice of Corporate Finance in Singapore (2016, LexisNexis) paras 6.129–6.136.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Dividends are discretionary

  • No obligation to pay div when profits available unless got specific provisions in co reg or allotment docs on right to div
  • SH can’t compel co to pay div
  • entirely discretionary on dirs to pay div based on commercial reasons
  • OK for dirs to appropriate profits from into reserve ac for future use
  • may not hv div declared after co in liquidation
  • Div include bonus and payment by way of bonus n may be paid by cash or bonus shares.
A

[403.06] There is no obligation for a company, even for preference shareholders, to pay dividends when profits are available unless there is a specific provision in the articles or issue/allotment documents that there is a right to a dividend: Re Holben, Hubbard & Co Ltd [1938] NZLR 54, SC. No shareholder can compel a company to pay dividends: Burland v Earle [1902] AC 83, PC . It is entirely discretionary on the part of the directors based on commercial reasons whether to declare a dividend: Industrial Equity Ltd v Blackburn (1977) 3 ACLR 89, HC ; Re Holben, Hubbard & Co Ltd (above). Sometimes, the directors may decide to appropriate the profits into the reserve account for future use of the company: Re Hume Industries (FE) Ltd [1974] 1 MLJ 167, HC. Dividends may not be declared after the company has gone into liquidation. “Dividends” include bonus and payment by way of bonus: s 403(5). Dividends may be paid by way of cash or bonus shares.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Interim dividends

  • not a debt n may be revoked unlike final div
  • wholly provisional n anticipates profits to be disclosed in the final accounts. So dirs better ensure profits available in final ac
A

[403.07] Directors may declare an interim dividend, which does not constitute a debt, and may revoke the interim dividend, unlike the final dividend: Lagunas Nitrate Co Ltd v Schroeder & Co (1901] 85 LT 22, HC ; Potel v Inland Revenue Commissioners [1971] 2 All ER 504, HC . An interim dividend is wholly provisional and anticipates profits to be disclosed in the final accounts: Marra Developments Ltd v BW Rofe Pty Ltd (1977) 3 ACLR 185, SC. Thus, directors who declare interim dividends had better ensure that there are profits available in the final accounts on pain of an offence under s 403(2)(a).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Debt owed by company

A

[403.08] Once a dividend has been validly declared, it is a debt owed by the company to the shareholders: Re Severn and Wye and Severn Bridge Rly Co [1896] 1 Ch 564, HC ; Industrial Ltd v Blackburn (1977) 3 ACLR 89, HC ; BSN Commercial Bank (M) Bhd v River View Properties Sdn Bhd [1996] 1 MLJ 872, HC. Once declared, the dividend cannot be reduced nor revoked: Marra Developments Ltd v BW Rofe Pty Ltd (1977) 3 ACLR 185, SC. A suit for unpaid dividend depends on a declaration being made by the directors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Profits applied toward share repurchase

  • profits used to buy back own share / share repurchase cannot he used to pay div
  • Ok to pay div from part profits from sale of treasury shares ie use 50k out of 60k. But gain of 10k cannot pay as dividend but book into reserve ac- aim to prevent co from using such profits which is not business profit to pay div
A

[403.09] Section 403(1A) provides that subject to subsection (1B), any profits applied towards a share repurchase in accordance with ss 76B and 76G shall not be payable as dividends to the shareholders of the company. For example, if a company makes $500,000 in profits in Financial Year 1, and it uses $50,000 to repurchase its own shares, then $50,000 cannot be payable as dividends for Financial Year 1. Subsection (1B) provides that subsection (1A) shall not apply to any part of the proceeds received by the company as consideration for the sale or disposal of treasury shares which the company has applied towards the profits of the company. In the above example, if the shares repurchased by the company are converted into treasury shares, and subsequently sold or disposed of, at say $60,000, then the company may apply $50,000 back into the revenue account to be distributed as dividends in Financial Year 2. However, subsection (1C) provides that the gains of $10,000 derived from the sale of treasury shares shall not be paid as dividends to the shareholders of the company. It has to be booked into the reserve account of the company. Note: the purpose of subsection (1C) is to prevent companies carrying out share repurchases to create profits for dividend purposes because such profits are not generated out of business profits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Director or chief executive officer personally liable

  • criminal liability
  • if Dir/Ceo breach s403, will personally liable to creditors on portion of div exceeded profits , such amt maybe recovered by creditors/ liquidators suing on creditors’ behalf
  • Dir/ceo can recover contribution from co-dirs who consented to such payment
  • liability of s403 not include a person’s estate or his executors or administrators after his death
  • breach of s403 by dirs = breach of fiduciary duty
A

[403.10] In addition to criminal liabilities under s 403(2)(a), s 403(2)(b) provides that every director or chief executive officer of a company who wilfully pays or permit to be paid any dividend in breach of s 403 shall be personally liable to the creditors of the company for the debts due by the company to them to the extent that the dividends so paid have exceeded the profits and any such amount may be recovered by the creditors or the liquidator suing on behalf of the creditors. The liquidator in the winding up of a limited company can recover from the directors dividends improperly paid by them, even though the creditors of the company have been satisfied: Re National Bank of Wales Ltd [1899] 2 Ch 629, CA . The director or chief executive officer may recover a contribution from the other co-directors who have directed or consented to such payment: s 403(3). Subsection (4) clarifies that any liability imposed by s 403 on any person shall not devolve on his estate or his executors or administrators after his death. A director who allowed a dividend to be paid when there were no profits committed a breach of his fiduciary duty by misapplying the company’s funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly