Dividends are the profits of trading divided among the shareholders in proportion to their shares.
The basic rule is that “dividends must not be paid out of capital”.
Declaration and Payment
There is no provision in the Act dealing with payment of dividends but it is governed by the articles of association failing which the provisions of Table A apply as follows: -
(i) Articles 114:-The Company in a general meeting may declare dividends but no dividend shall exceed the amount recommended by the directors. No dividend can be declared if the directors have recommended none.
(ii) Articles 115:-The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company. A resolution passed at a general meeting directing the director to pay interim dividends is invalid (Scott vs. Scott)
(iii) Article 116:-No dividend shall be paid otherwise than out of profits. Because the word “profits” is ambiguous, this provision be understood to mean “dividends must not be paid out of capital”. Provided dividends are not paid out of capital it does not matter from whatever it is paid.
(iv) Article 120:-Any general meeting declaring dividends may direct payment of such dividend wholly or partly by the distribution of specific assets and in particular shares- dividend in kind.
(v) Article 121:-Any dividend payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder.
(vi) Article 122:-No dividend shall bear interest against the company. At common law the declaration of a dividend creates a single contract debt due from the company to the shareholder which will be time barred in six years from the date of declaration.
Case Law relating to Dividends:
Losses in precious years need not be provided for. A dividend can be paid if there is a profit on the current year’s trading.
Profits of previous years can be brought forward and distributed even if there is a revenue loss in the current trading year.
Losses on fixed assets in the current year need not be made good by provision for depreciation before treating a revenue profit as available for dividend.
Unrealized profits on revaluation of assets can be distributed by way of a dividend or used to pay a bonus issue.
Dividends must not be paid out of capital