Summary: A dividend, representing a distribution of company profits to shareholders, is categorized as either a final dividend (recommended by the Board and declared by members at an Annual General Meeting) or an interim dividend (declared by the Board of Directors). Once a final dividend is declared by the shareholders, it legally becomes a debt owed by the company to its shareholders and generally cannot be unilaterally revoked. This means shareholders have a legal right to claim this debt, and any attempt to cancel it can be challenged. Conversely, an interim dividend, being a decision solely by the Board, does not create a debt until it is actually paid. Therefore, an interim dividend can be revoked or cancelled by the Board at any time before its payment. However, in exceptional circumstances, such as an illegal declaration of dividend, unforeseen events like war or natural disasters impacting the company’s financial stability, the imposition of new significant taxes, or severe financial distress that threatens the company’s going concern status, a declared dividend (both final and interim, though the text states final dividend provisions also apply to interim dividend, contradicting the previous statement about interim dividend revocation, indicating a potential ambiguity in the provided text) might be revoked, ideally with shareholder consent, to conserve funds.
As you are aware that “Dividend” is a return on investment made by shareholders in a Capital of a Company and it is different from return on borrowed Capital as interest. A dividend is share of profit to the shareholders of a company ,in which he/she /it has invested.
The SS-3 Defines Dividend as -“Dividend” means a distribution of any sums to Members out of profits and wherever permitted out of free reserves available for the purpose”.
“Final Dividend” means the Dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting.
“Interim Dividend” means the Dividend declared by the Board of Directors.
A Dividend must be declared out of profits of the Company-
The Act does not define the term “Profit”, which must, therefore, be understood in its natural and proper sense.
In Re. Spanish Prospecting Co. Ltd (1911) 1 Ch 92, Moulton L.J. explained the term ‘Profit’ as under:
“Profit implies a comparison between the state of business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. If the total assets of the business at the two dates are compared, the increase which they show at the later date as compared with the earlier date (due allowance, of course, being made for capital introduced into or taken out of the business in the mean while) represents, in strict sense, the profits of the business during the period in question”.
Profit means the net proceeds of the company after deducting the necessary expenses without which those proceeds could not be earned [Bharat Insurance Co. Ltd., Lahore v. Commissioner of Income Tax (1931)1 Comp. Cases 192 (Lah)].
The statement of profit and loss shall be prepared in accordance with the generally accepted accounting principles, applicable accounting standards and presented in conformity with the requirements set out in the Act or other applicable laws.
Guidance Note on Dividend SS-2
Dividend shall be declared only on the recommendation of the Board, made at a meeting of the Board.
Dividend being an important decision and having impact on the financial position of the company should be considered at a meeting of the Board and not at a meeting of a committee of the Board or by way of a Resolution passed by circulation.
Unless the Dividend has been recommended by the Board, Members in Annual General Meeting cannot on their own declare any Dividend.
Where a company has an Audit Committee, this Committee shall consider the annual financial statements before submission to the Board.
Dividend shall be recommended by the Board after consideration and approval of said financial statements.
DIVIDEND SHOULD NOT BE CONDITIONAL;
All requisite approvals shall be obtained before declaration of Dividend. Dividend shall not be declared subject to any condition such as the approval of financial institutions/ banks or foreign collaborators or compliance with any other contractual obligation.
The above paragraph pertaining to requisite approval of financial institutions/ banks or foreign collaborators etc. is equally applicable to both Interim and Final Dividend.
Dividend should not be declared subject to any condition such as obtaining of approval from financial institutions/banks etc. [erstwhile Department of Company Affairs (DCA) Circular No. 2/98 dated 13.04.1998)].
DIVIDEND SHALL BE DECLARED ONLY AT THE AGM NOT ON EOGM
Dividend shall be declared only at an Annual General Meeting of the Company and not at an Extra-ordinary General Meeting or by way of a postal ballot.
The cumulative effect of all the provisions of the Act is that the declaration of Dividend should be made at the Annual General Meeting of the Company. [Raghunandan Neotia v. Swadeshi Cloth Dealers Ltd., (1964) 34 Comp. Cases 570 (Cal.)]
Dividend shall relate to a financial year and shall be declared by the Members at the Annual General Meeting of the company after adoption of the financial statements of the company.
Members may declare a lower rate of Dividend than the rate recommended by the Board but have no power to increase the amount or rate of Dividend recommended by the Board.
The company in general meeting may declare Dividends, but no Dividend shall exceed the amount recommended by the Board. [Regulation 80 of Table F of Schedule I to the Act].
It is well established and the law is quite clear that Dividend can only be declared by the Members of the company. [Kantilal v. Commissioner of Income Tax (1956) 26 Comp. Cases 357 (Bom.)]
Dividend should be declared by the Members after consideration of the annual accounts at the Annual General Meeting of the company and should relate to a financial year. Members may vote for a lower rate of Dividend than what is recommended by the Board. The Members may also decide not to declare the Dividend recommended by the Board. The Dividend, if declared, should be disclosed on per share basis. The disclosure of Dividend on per share basis is applicable to listed companies only; however, as a good governance practice and to promote uniformity, the Standard requires the said disclosure to be made by all companies.
INTERIM DIVIDEND SHALL BE DECLARED AT A MEETING OF THE BOARD. While Final Dividend is recommended by the Board and declared by the Members, approval of Members is not required for declaration of Interim Dividend.
Where a company has an Audit Committee, this Committee shall consider the financial results which shall thereafter be submitted to the Board for its consideration and declaration of Interim Dividend.
Once an Interim Dividend is declared by the Board, its noting, approval, confirmation or ratification in a general meeting is not required.
However, the Board’s Report should mention the amount of Interim Dividend paid by the company.
Any resolution passed by the company in general meeting requiring the Directors to declare an Interim Dividend is inoperative.
Before declaring an Interim Dividend, the Board should carefully consider the interim financial statements of the company made up to the last possible period of the financial year in respect of which Interim Dividend is proposed to be declared in line with the Dividend Policy of the company.
The Board should satisfy itself that the outflow on account of payment of the Interim Dividend will not jeopardize the ability of the company to meet the other requirements such as paying Dividend at the contracted rate on preference shares.
The Board should also ensure that all arrears of preference Dividend are paid before declaring any Interim Dividend.
PLEASE NOTE THAT:
Even where Dividend is declared out of free reserves, in case of absence or inadequacy of profits, Preference Shareholders have priority over equity Shareholders in respect of payment of Dividend. However, when the Board declares Interim Dividend on equity shares, it is not necessary to declare Interim Dividend on preference shares also.
In the case of Interim Dividend, while Preference Shareholders need not necessarily be paid Dividend before Interim Dividend is paid to equity Shareholders, the Board should take into account such sum as would be necessary to pay Dividend to the Preference Shareholders before consideration of Interim Dividend.
LET’S DISCUSS REVOCATION OF DECLARED DIVIDEND
Once a dividend declared by a company , cannot be revoked except with the consent of Shareholders. Since a declared dividend become a “ Debt” in favour of shareholders declaring the same. It means that a declared dividend become a debt in favour of shareholders of the Company.
Dividend when proposed does not become a debt. The right of Members to claim Dividend arises only after the Dividend is declared either by the company in an Annual General Meeting or, in the case of Interim Dividend, by the Directors in a Board Meeting. Until and unless it is so declared, no Member has any claim against the company in respect thereof, even though the company may have sufficient profits [Bacha F. Guzdar v Commissioner of Income Tax 1955 AIR SC 740].
Members cannot compel the company by any process of law to declare Dividend [C.W. Spencer v. ITO, (1957) 27 Comp. Cases 15, 25 (Mad)].
A Dividend once declared becomes a debt due to the Members and hence cannot be revoked. It gives rise to an enforceable obligation or creates a debt enforceable immediately or in the future.
ANALYSIS: It is possible for a company to suspend the payment of dividends (ie to decide not to pay them for a time), as a company is not obliged to pay dividends. It is also possible for a company to cancel a dividend (ie not pay a dividend that it had already indicated that it intended to pay), although if and when a company can cancel a dividend will depend on whether it is a final dividend or an interim dividend.
Once a final dividend is declared (ie approved by the shareholders) it becomes a debt that is immediately due from the company to its shareholders, unless the terms of an approving resolution provide for it to be payable at a future date, in which case it becomes a debt due only on that date.
Once a final dividend has become a debt due, its payment can be enforced, meaning that the shareholders have a right to sue for that debt, if the dividend is cancelled.
In contrast, the payment of an interim dividend is a decision of the directors and no debt due from the company to its shareholders is created at the time that decision is made, so an interim dividend can be cancelled at any time up to its payment. A shareholder’s right to an interim dividend does not arise until the dividend is actually paid.
It was held in Kishinchand Chellaram Vs. CIT(1962)32 ComCases 1046,1050 390:AIR 1963 SC- if a dividend is declared and the amount is credited or paid to shareholders ,the character of payment of dividend cannot be altered by any subsequent resolution.
But in some adverse cases such as illegal declaration of dividend, destruction of office premises by perils ,imposition of new tax by government, Financial Trouble, Unexpected expenses or war or other situation which are going to badly affect going concern of the company. In such cases it is better to conserve funds of the company for future contingencies and declared dividend may be revoked before payment to the shareholders.
CONCLUSION: Dividend declared with the approval of the shareholders creates a debt due to the shareholders. Generally, dividend declared cannot be revoked except with the approval of the shareholders in the event:
– of the intervening circumstances after the declaration, such as the outbreak of a war, massive fire destroying the properties of the company, imposition of hard taxes, or other causes diminishing the assets of the company.
– where a dividend has been declared illegally or violating the requirements of the law, the board of directors would be justified in revoking the dividend.
- Since provisions of Final Dividend are also applicable to Interim Dividend. Once declared interim dividend cannot be revoked except with the consent of shareholders.
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DISCLAIMER: the article presented here is only for sharing knowledge with readers on subject matter. The views are personal and shall not be considered as professional advice. In case of necessity do consult with professionals.
SOURCE Guidance note on declaration of Dividend ICSI.
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