Day 145 Dividend regulations

Dividend regulations

Same as the share rights variation and capital reduction, the dividend payment a company is also strictly regulated by the statutory act. As we know, the dividend is the distribution of company’s profit to its members. So this is the main reason for statutory provisions to take place. 

According to the S.124(1)(d) Corporations act, the company is a separate legal entity which has the power to distribute any of the company’s property among the members, in kind or otherwise. Generally, the process of making dividend allotment decision is instructed in the constitution or the replaceable rule S. 254U. Where the directors may determine the dividend is payable and fix the amount, time and method of the dividend to be paid. In most cases, the directors hold this decision power, and the shareholders cannot interfere with it. The S.254W has provided some extra backings for it, that directors can make the payment decision when they see fit. The only exemption for this rule is when the situation applies to oppressive and unfair conduct. Thereby the members may apply for remedies suggested in S.232. In the old law before 2010, the statue requested the dividend must be paid out from company’s profit. However, when the new legislation taken effect after 2010, the entity will need only to achieve three fundamental grounds in order to make a proper dividend payment decision. Firstly, the corporation must remain solvent, which the debts can be sufficiently covered by its assets. We should understand the company does not merely incur a debt by fixing the amount and time of the payment, due to the payment can be revoked anytime before then. (S.254V)However, if the company’s constitution that provides the declaration of dividends, the company incurs a debt when the dividend is declared. It is also worth to mention that any interim dividend declaration will not incur a debt, since it is just an estimation of payment in the financial year. In addition, the entity has to prove that the payment of dividend is fair and reasonable to shareholders as a whole. Thus all shareholders will receive their entitled dividend corresponding to class rights. Moreover, the company’s ability to pay creditors must not be materially prejudiced. 

In conclusion, the restriction on dividend payment is still with the purpose to protect the company’s creditors right, same as the provisions on capital reduction, financial assistance on purchasing shares and share buy-backs. We have to comprehend that it is not an obligation for the company to distribute the dividend to ordinary shareholders.