Company Law-II

Module IV: Corporate Accountability: Divisible Profits and Dividends

Module IV: Topics to be Covered


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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

. Cas.CIT v. (P. [1967] 21 Comp.) Ltd. 932 As applied to a company which is a going concern. In the case of winding-up . it ordinarily means the portion of the profits of the company which is allocated to the holders of the shares in the company. Girdhar Das & Co. 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’.

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

Divisible Profits: .

Divisible Profits: Meaning Profits Distributed (Legally) Shareholders (in form of dividends) Divisible Profits .

. In re [1947] Ch. reserves and for other purposes.Buenos Ayres Great Southern Rly.. 384 ‘Divisible profits’ were described to mean the profits which the directors consider should be distributed after making provision for past losses. Co.

Sources Out of which dividend may be paid .

Past reserves created out of profits or credit balance in the profit and loss account brought forward 3. Out of current Profits 2. .Sources Out of which dividend may be paid 1. Out of the money provided by the Government.

OUT OF CURRENT PROFITS .Sources Out of which dividend may be paid 1.

Proviso (c) to Section 205 (1) Application for exemption should be made to government in e-form 23 AAC. . Out of current profits (Section 205): Dividends (current year) declared out of the profits after providing for depreciation.1.

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 12.5% 5% 7.50% 12.01% to 20% Over 20% % of Current profits Nil 2.5% 10% .51% to 15% 15.

OUT OF PAST RESERVES .Sources Out of which dividend may be paid 2.

Out of past reserves: Section 205 A (3) inserted by the Companies (Amendment) Act. 1975 . 1974 Central Government framed: The Companies (Declaration of Dividend out of Reserves) Rules.

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. or Whichever is less 10 % of its paidup capital . 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.

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 .B.

• The balance of reserves after • Such drawal • Does not fall below 15% of its paidup share capital .C.

Sources Out of which dividend may be paid 3. MONIES PROVIDED BY GOVERNMENT .

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 .3.

Unpaid and Unclaimed Dividends .

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. a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration.. Company Limited/Company (Private) Limited”.... after the commencement of the Companies (Amendment) Act. to be called “Unpaid Dividend Account of .... to any shareholder entitled to the payment of the dividend. ..Unpaid and Unclaimed Dividends Where... to a special account to be opened by the company in that behalf in any bank. 1974.

.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.

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

contain provisions relating to:  constitution and functions of the Committee. inter alia.  proforma for applications for registration of associations. 2001 These Rules. institutions or organisations and  also for seeking financial assistance under IEPF.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.  awareness and protection to be undertaken with the recommendation of the Committee. . etc.  activities relating to investors’ education.  conditions for utilisation of Funds by the Committee.

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

. awareness and protection activities.  Proposals for registration of Voluntary Associations or Institution or other Organizations engaged in Investor Education and Protection activities.  Organizing Seminars and Symposia.  Proposals for projects for Investors’ Education and Protection including research activities and proposals for financing such projects.  Coordinating with institutions engaged in Investor Education.Functions of the Main Committee  Education Programmes through Media.

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 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 Committee may have Sub-Committee to examine the end use of grants and assistance and recommend release of funds. the members of the Sub-Committee elect a convenor amongst themselves.

Payment of dividend out of capital .

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

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. the directors may have a right of indemnity against such members to the extend that they have respectively received dividends. . {Moxham v. In re [1886] 35 Ch. D. Grant [1900] 1 QB 88 (CA)} 1.). 2. If the members who received dividends know that they have been paid out of the capital.

558). When dividends improperly paid out of capital have been made good out of subsequent profits. a member who has received such dividends cannot maintain an action against the directors (Towers v. [1904] 1 Ch. liability ceases to attach to the directors.Consequences of payment of dividend out of capital 3. 4. . African Tug Co. 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.

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