Chapter 8 - Declaration and Payment of Dividend

 

Q&A Format for Declaration and Payment of Dividend


Question 1: What is a Dividend?

Answer 1:
A dividend is a portion of a company's profit that is distributed to its shareholders. It is usually paid in cash but may also be issued in the form of additional shares. The Companies Act, 2013 defines dividend under Section 2(35) as any payment made by a company to its shareholders out of its profits or reserves. However, the payment of dividend must be authorized by the Board of Directors and approved by shareholders.


Question 2: What are the provisions related to the declaration of dividend under the Companies Act, 2013?

Answer 2:
The declaration of dividends is governed by Section 123 of the Companies Act, 2013, which lays down the following key provisions:

  1. Profit Availability: A company can declare a dividend only out of its current year profits or accumulated profits from previous years, provided it has adequate reserves.
  2. Solvency Test: Before declaring a dividend, the Board of Directors must ensure that the company will remain solvent after the dividend distribution, i.e., it will be able to meet its liabilities.
  3. Restriction on Dividend Payment: The company cannot declare a dividend unless it has paid off its preferential dividend (if applicable) and has set aside a certain percentage for debenture holders (if applicable).
  4. Payment of Dividend: The dividend must be paid within 30 days from the date of declaration, and the Board of Directors decides the mode of payment (cash, stock dividend, etc.).

Question 3: What are the conditions under which a company cannot declare a dividend under the Companies Act, 2013?

Answer 3:
The Companies Act, 2013 provides the following conditions where a company cannot declare a dividend:

  1. Inadequate Profits: A company cannot declare a dividend if it does not have sufficient profits for the year or accumulated profits from the previous years.
  2. Accumulated Losses: If the company has accumulated losses, it cannot pay a dividend unless it has reserves to cover the losses.
  3. Failure to Pay Debts: If a company has outstanding debts or liabilities, it must ensure the payment of debts before declaring a dividend.
  4. Non-Compliance with Solvency Test: If the company fails the solvency test (i.e., declaring the dividend will lead to the company being unable to meet its liabilities), it cannot declare a dividend.

Question 4: What is the role of the Board of Directors in declaring a dividend?

Answer 4:
Under the Companies Act, 2013, the Board of Directors plays a critical role in the declaration of dividends. The Board is responsible for:

  1. Recommendation: The Board recommends the amount of dividend to be paid to shareholders, based on the company’s profits, available reserves, and solvency position.
  2. Approval: After the Board’s recommendation, the shareholders must approve the dividend in the Annual General Meeting (AGM).
  3. Compliance with Legal Provisions: The Board ensures compliance with all provisions under the Companies Act, such as the availability of profits, payment of preference dividends, and solvency requirements before declaring the dividend.

Question 5: What are the key conditions for the payment of dividend to shareholders under the Companies Act, 2013?

Answer 5:
The following are key conditions for the payment of a dividend to shareholders:

  1. Declaration by Shareholders: After the Board recommends a dividend, it must be approved by the shareholders in a general meeting (usually AGM).
  2. Mode of Payment: The dividend can be paid in cash, kind, or as bonus shares.
  3. Time Limit: Once declared, the dividend must be paid within 30 days from the declaration date.
  4. Dividend Distribution to Equity Shareholders: Dividends are distributed proportionately to equity shareholders based on the number of shares held by them, unless the company has a preference share capital.
  5. Compliance with Payment of Dividend Rules: The company must follow the rules laid down in the Companies Act and maintain the solvency and proper accounting records for the payment process.

Question 6: What are the penalties for non-compliance in the declaration and payment of dividends?

Answer 6:
Non-compliance with the provisions of dividend declaration and payment can lead to various penalties under the Companies Act, 2013:

  1. Penalty for Default: If a company defaults in paying the dividend as per the provisions of the Act, it can be fined up to ₹1,00,000.
  2. Further Penalty for Continuous Default: If the default continues, an additional fine of up to ₹5,00,000 may be levied.
  3. Imprisonment for Directors: If the directors knowingly authorize a wrongful declaration of dividends, they may be subject to imprisonment for up to 6 months and/or a fine.
  4. Liability for False Declaration: If the company declares a dividend without proper authorization or financial backing, the company and its directors may be held personally liable.

Question 7: How are dividends treated in case of a preference share capital company?

Answer 7:
For a company with preference share capital, the payment of dividends is subject to the following provisions:

  1. Preference Shareholders: Preference shareholders are paid fixed dividends before any dividend is paid to equity shareholders.
  2. Accumulation of Dividend: If the preference dividend is not paid in a particular year, it can accumulate and must be paid out in subsequent years before equity dividends are paid.
  3. Priority in Payment: In case of liquidation, preference shareholders are given priority over equity shareholders in the distribution of remaining assets.

Conclusion:

In conclusion, the declaration and payment of dividends under the Companies Act, 2013 involves several legal and financial considerations, including profitability, availability of reserves, compliance with solvency tests, and proper authorization from the Board and shareholders. Non-compliance can attract penalties for both the company and its directors. Proper management of profit distribution ensures that shareholders receive fair returns while the financial health of the company is maintained.


Additional Tips for 10 Marks:

For a 10-mark answer, ensure you cover all aspects comprehensively:

  • Structure: Start with a brief introduction, move to key provisions, roles, conditions, and penalties.
  • Use Legal References: Refer to sections like Section 123, Section 2(35), and relevant penalties.
  • Depth and Examples: Include real-world examples where applicable (e.g., dividend payment practices of major companies).
  • Case Studies or Practical Insights: If time permits, mention real cases of companies facing issues due to dividend non-compliance.

 


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