dividend out of capital

The One Says:

This aspect is governed by Companies (Declaration of Dividend out of Reserves) Rules, 1975.

In the event of inadequacy or absence of profits in any year, dividend may be declared by a company for that year out of the accumulated profits earned by it in previous years and transferred by it to the reserves, subject to the conditions that-

    (i) the rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the five years immediately preceding that year or ten per cent of its paid up capital, whichever is less;

    (ii) the total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves shall not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves and the amount so drawn shall first be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared; and

    (iii) the balance of reserves after such drawl shall not fall below fifteen per cent of its paid up share capital.

Reserves for this purpose include DRR-Development Rebate Reserve (after expiry of period under Income Tax Act) and exclude Revaluation Reserves (created on revaluation of fixed assets)

Payment of dividend out of capital is permitted in certain cases (mostly losses for several years) to preference shareholders (overseas) with government approval. This is for similar purposes as interest is allowed to be paid out u/s 208 ie to defray certain expenses

[b]Otherwise u/s 205 dividend to be paid out of profits only.[/b]

As regards the case law I can't recollect any information on that at present, frankly I have never heard of it before :o. Whenever I come across it I will post the same.

Hope its useful.

Now in current senerio:

A company cannot pay dividend out of its capital( in Re Oxford Benefit Building and Investment Society case, it was held that" Directors are Quasi trustees of Capital of Comapny and directors who improperly pay dividend out of capital are personally liable to repay such dividend upon company being wound up because such an act is a breach of trust and remedy is not barred by statue of limitation").

However if it pays then directors shall be personally liable to make good to company the amount of dividend paid out of capital. But they will have the right to indemnity against the members if it was in the in knowledge of the members that they were being paid out of capital.

further directors liability ceases if the dividend paid out of capital is made good out the subsequent profits