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.