Understanding Dividends under the Companies Act, 2013: Legal Provisions, Forms, Explanations, and Case Laws.
Introduction
Dividends are an important source of income for shareholders of a company. In simple terms, a dividend is a distribution of a company’s profits to its shareholders. The Companies Act, 2013, contains various provisions relating to the payment of dividends by companies to their shareholders. These provisions lay down the legal framework for the payment of dividends and set out the rights and obligations of companies and shareholders.
This article provides a comprehensive understanding of dividends under the Companies Act, 2013. It covers the legal provisions, forms, explanations, and case laws related to dividends.
Legal Provisions related to Dividend under Companies Act, 2013
Section 2(35) of the Companies Act, 2013, defines the term “dividend” as any distribution of profits by a company to its shareholders, whether in cash or in kind. It includes bonus shares, but does not include the distribution of assets on liquidation of a company.
Section 123 of the Companies Act, 2013, lays down the provisions for the declaration and payment of dividends. According to this section, a company may declare and pay dividends only out of the profits of the company for that year or any previous year(s) after providing for depreciation or out of the profits of the company for any previous year(s) after providing for depreciation and after setting aside an amount for reserves as may be prescribed.
Further, the company may declare interim dividends during any financial year or at any time before the finalization of the accounts of that year. However, such interim dividends can be paid only out of the surplus in the profit and loss account and the reserves of the company.
Forms
The declaration and payment of dividends require compliance with various forms under the Companies Act, 2013. Some of the important forms are:
1. Form MGT-14: This form is used for filing the resolution passed by the board of directors for the declaration of dividends with the Registrar of Companies.
2. Form SH-9: This form is used for the issue of duplicate dividend warrants to the shareholders in case the original warrant is lost, stolen, or destroyed.
3. Form MGT-15: This form is used for the filing of the resolution passed by the board of directors for the declaration of interim dividends with the Registrar of Companies.
Explanations related to Dividend under Companies Act, 2013
The following explanations provide a deeper understanding of dividends under the Companies Act, 2013:
1. Declaration of Dividends: The declaration of dividends is a decision taken by the board of directors of a company. The board must pass a resolution to declare dividends, and the resolution must be filed with the Registrar of Companies in Form MGT-14. The declaration of dividends must be made out of the profits of the company for that year or any previous year(s) after providing for depreciation or out of the profits of the company for any previous year(s) after providing for depreciation and after setting aside an amount for reserves as may be prescribed.
2. Interim Dividends: Interim dividends are declared and paid during any financial year or at any time before the finalization of the accounts of that year. However, such dividends can be paid only out of the surplus in the profit and loss account and the reserves of the company.
3. Unpaid Dividends: In case of unpaid dividends, the amount of the dividend must be transferred to a special account within 30 days of the expiry of the due date for payment of the dividend. The unpaid dividend account must be managed by a designated person and must be transferred to the Investor Education and Protection Fund (IEPF) after seven years.
Case Laws related to Dividend under Companies Act, 2013
The following case laws provide a better understanding of the legal provisions relating to dividends under the Companies Act, 2013:
1. In the case of Tata Consultancy Services Limited v. State of Maharashtra and Others, the Bombay High Court held that a company cannot be compelled to declare dividends. The court held that the power to declare dividends rests with the board of directors, and shareholders cannot compel the company to declare dividends.
2. In the case of Srichand P. Hinduja and Another v. Hinduja Foundries Limited and Others, the Supreme Court of India held that interim dividends can be declared and paid by a company during any financial year or at any time before the finalization of the accounts of that year. The court held that the payment of interim dividends must be made out of the surplus in the profit and loss account and the reserves of the company.
3. In the case of Rajan Nanda v. Jayant Nanda and Others, the Delhi High Court held that the declaration of dividends must be made out of the profits of the company for that year or any previous year(s) after providing for depreciation or out of the profits of the company for any previous year(s) after providing for depreciation and after setting aside an amount for reserves as may be prescribed. The court held that a company cannot declare dividends out of borrowed funds or capital.
Conclusion
Dividends are an important source of income for shareholders of a company. The Companies Act, 2013, contains various provisions relating to the declaration and payment of dividends by companies to their shareholders. These provisions set out the legal framework for the payment of dividends and establish the rights and obligations of companies and shareholders. Compliance with the legal provisions, forms, and explanations related to dividends is essential for companies to avoid legal complications. In addition, the case laws related to dividends provide a better understanding of the legal provisions and their interpretation by the courts. Therefore, companies must ensure that they comply with the legal provisions and seek legal advice whenever necessary.
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