As you are aware that Companies Act, 2013 ("the Act"), inter alia provides for declaration of dividend out of profits. Profit here is the net profit of a company, as determined for preparing financial statements, as per the provisions of Section 129 of the Act and after complying with all the applicable accounting standards notified under Section 133 of the Act.
Section 2(35) of the Act states that the term 'dividend' includes any interim dividend.
Section 123(1) of the Act inter-alia states that "no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year or out of the profits of the company for any previous financial years".
By the insertion of proviso to Section 123(1)(a), it has been expressly clarified that in computing profits, any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded.
Further, the Second proviso to Section 123(1)(b) states that in case of inadequacy or absence of profits, the company can propose to declare dividend out of the free reserves of the company, after complying with the restrictions prescribed under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 ("Dividend Rules"). PLEASE NOTE THAT: Dividend, once declared, becomes a debt and shall not be revoked. Dividend when proposed does not become a debt. The right of Members to claim Dividend arises only after the Dividend is declared either by the company in an Annual General Meeting or, in the case of Interim Dividend, by the Directors in a Board Meeting. Until and unless it is so declared, no Member has any claim against the company in respect thereof, even though the company may have sufficient profits [Bacha F. Guzdar v Commissioner of Income Tax 1955 AIR SC 740].
Members cannot compel the company by any process of law to declare Dividend [C.W. Spencer v. ITO, (1957) 27 Comp. Cases 15, 25 (Mad)].
A Dividend once declared becomes a debt due to the Members and hence cannot be revoked. It gives rise to an enforceable obligation or creates a debt enforceable immediately or in the future.
GUIDANCE NOTE ON DIVIDEND SS-2
Dividend shall be declared only on the recommendation of the Board, made at a meeting of the Board.
Dividend being an important decision and having impact on the financial position of the company should be considered at a meeting of the Board and not at a meeting of a committee of the Board or by way of a Resolution passed by circulation.
Unless the Dividend has been recommended by the Board, Members in Annual General Meeting cannot on their own declare any Dividend.
Where a company has an Audit Committee, this Committee shall consider the annual financial statements before submission to the Board
Dividend shall be recommended by the Board after consideration and approval of said financial statements.
LET'S DISCUSS REVOCATION OF DECLARED DIVIDEND
Once a dividend declared by a company , cannot be revoked except with the consent of Shareholders. Since a declared dividend become a " Debt" in favour of shareholders declaring the same. It means that a declared dividend become a debt in favour of shareholders of the Company.
Dividend when proposed does not become a debt. The right of Members to claim Dividend arises only after the Dividend is declared either by the company in an Annual General Meeting or, in the case of Interim Dividend, by the Directors in a Board Meeting.
ANALYSIS
It is possible for a company to suspend the payment of dividends (i.e. to decide not to pay them for a time), as a company is not obliged to pay dividends. It is also possible for a company to cancel a dividend (i.e. not pay a dividend that it had already indicated that it intended to pay), although if and when a company can cancel a dividend will depend on whether it is a final dividend or an interim dividend.
ONCE A FINAL DIVIDEND is declared (i.e. approved by the shareholders) it becomes a debt that is immediately due from the company to its shareholders, unless the terms of an approving resolution provide for it to be payable at a future date, in which case it becomes a debt due only on that date.
Once a final dividend has become a debt due, its payment can be enforced, meaning that the shareholders have a right to sue for that debt, if the dividend is cancelled.
IN CONTRAST, THE PAYMENT OF AN INTERIM DIVIDEND is a decision of the directors and no debt due from the company to its shareholders is created at the time that decision is made, so an interim dividend can be cancelled at any time up to its payment. A shareholder's right to an interim dividend does not arise until the dividend is actually paid.
It was held in Kishinchand Chellaram Vs. CIT(1962)32 Com Cases 1046,1050 390:AIR 1963 SC- if a dividend is declared and the amount is credited or paid to shareholders ,the character of payment of dividend cannot be altered by any subsequent resolution.
But in some adverse cases such as illegal declaration of dividend, destruction of office premises by perils, imposition of new tax by government, Financial Trouble, Unexpected expenses or war or other situation which are going to badly affect going concern of the company. In such cases it is better to conserve funds of the company for future contingencies and declared dividend may be revoked before payment to the shareholders.
CONCLUSION
Dividend declared with the approval of the shareholders creates a debt due to the shareholders. Generally, dividend declared cannot be revoked except with the approval of the shareholders in the event:
- Of the intervening circumstances after the declaration, such as the outbreak of a war, massive fire destroying the properties of the company, imposition of hard taxes, or other causes diminishing the assets of the company.
- Where a dividend has been declared illegally or violating the requirements of the law, the board of directors would be justified in revoking the dividend.
- Since provisions of Final Dividend are also applicable to Interim Dividend. Once declared interim dividend cannot be revoked except with the consent of shareholders.
ADDITIONAL COMPLIANCES APPLICABLE TO LISTED COMPANIES
A LISTED COMPANY SHALL CONFORM TO THE FOLLOWING:
(i) The equity shares allotted by the company shall rank pari passu with the existing equity shares for the purpose of payment of Dividend, if the same are in existence as on the record date/ book closure.
(ii) The company shall not issue shares in any manner which may confer on any person, superior rights as to voting or Dividend vis-à-vis the rights on equity shares that are already listed.
(iii) The company shall give prior intimation to the Stock Exchange(s) about the Board Meeting in which Dividend is proposed to be recommended / declared, at least two working days in advance excluding the date of the meeting and the date of the intimation.
(iv) The company shall intimate the Stock Exchange(s), the record date fixed for the purpose of payment of Dividend at least seven working days in advance excluding the date of the intimation and the record date.
(v) The company shall recommend or declare Dividend at least five working days before the record date fixed for the purpose. The said period of five working days is excluding the date of declaration/recommendation of Dividend and the record date fixed for the purpose.
(vi) The company shall disclose the outcome of the Board Meeting held to consider the Dividend matters, to the Stock Exchange(s) within 30 minutes of closure of the meeting. In case of recommendation / declaration of Dividend, the intimation shall also include the date on which such Dividend shall be paid or Dividend warrant shall be despatched.
(vii) In case of payment of Dividend through warrant or cheque payable at par, if the amount of Dividend exceeds one thousand and five hundred rupees, the company shall despatch such Dividend warrant or cheque by speed post to the concerned Member at the registered address.
(viii) The company shall declare and disclose Dividend on per share basis only
(ix) The company shall not forfeit unclaimed Dividends before the claim becomes barred by law and such forfeiture, if effected, shall be annulled in appropriate cases.
(x) Top five hundred Listed Companies based on market capitalisation as on 31st March every financial year, shall formulate a Dividend Distribution Policy covering the prescribed parameters by Securities and Exchange Board of India (SEBI). Such policy shall be disclosed in the Annual Report of the company and also be placed on its website.
(xi) The company shall disclose in its Corporate Governance Report the Dividend payment date under the General Shareholder Information Section.
DISCLAIMER: The article presented here is only for sharing knowledge with readers on subject matter. The views are personal and shall not be considered as professional advice. In case of necessity do consult with professionals.
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