As per the co.1984 dividend must be declared out of profits of the company. now can someone guide me in determining whether in following cases dividend can be declared along with justification
1. If a company has loss for the year of Rs. 100,000 and accumulated profits of Rs. 1,000,000.assume all the profit of Rs. 1,000,000 is of revenue nature( no profit on sale of fixed assets etc)
2. If company has profit for the year of Rs. 100,000(All revenue nature) and accumulated losses of Rs. 1,000,000 and as a reult accumulated losses carried forward will be Rs. 900,000.
paid up capital of company is Rs.1,000,000 and directors want to pay dividend @ 10%
Bilal,
It's really a nice question. Thanks God we are seeing some professional queries, otherwise the forum was becoming a place of only the academic questions.
First of all I remind you that term PROFIT(s) has no where been defined in CO84. For guidance purpose judiciary, regulators as well as advisors always refer to the definition given in repealed Companies Act 1913. Probably in its section 87C.
Having said that I come to your queries.
Reply to query 1
The company can pay dividend to the extent of all the accumulated profits keeping the capital unaffected. The current year's loss does not make it illegal. However, in certain cases entities have to keep in view the minimum capital requirements stipulated by specific legislature where the term minimum capital means equity instead of paid up capital. Examples are banks, NBFCs, Modarabas, Insurance companies, stock exchange brokers etc. They cannot pay dividend even out of profits if it results in non compliance of minimum capital (capital adequacy) requirement.
Reply to query 2
In my confirmed view company can pay dividend out of current year's profit regardless of accumulated losses which might have eroded the paid up capital.
The reason is, the capital has not been eroded by current year's results. Rather it was a past event which will be partially repaired even if the company pays the dividend somewhat lesser than the profit earned during the year.
I know some companies which had paid dividend in the situation described in your second query. I also know some companies which did so on the instructions of SECP in similar circumstances.
This matter has not been discussed in law specifically but there are legally enforceable precedents available for doing so.
The known logic is what I have explained.
Hope your question has been replied.
Regards,
KAMRAN.
Although, Kamran bhai has replied the query in a well-mannered and have kept no way for equivocalness.
In case 1, There should not have any ambiguity regarding dividend declaration, since company has sufficient accumulated profits, which is much on the higher side (as a denomination to paid up capital of Rs. 1000,000)
However, in case 2, care must be taken while such contemplation(where, after declaration of dividends of Rs. 100,000 i.e. equal to profit of the year,nothing shall remain to offset the accumulated losses even a bit) specifically, when it is interim declaration on the anticipation of future profits,differently,contrary to the anticipation, it shall be tantamount to the voluntary reduction in capital, without compliance to section 96, ultimately directors shall be penalized for such act,
Practically, this is not considered to be prudent to do so,
However, It has been declared in some judicial cases,which favour Case 2 positively.
Best Regards,
Faisal,
In case 2, we have number of examples where dividend is paid from current year's profit although there were accunulated opening losses.
In some cases SECP instructed to take care of at least minority shareholders for paying dividend. We have examples where majority shareholders waived their right to dividend and only minority was paid.
In the query raised by Bilal 10 percent dividend will be equal to the current year's profit which can be paid as per available precedents. This will not be considered payment out of capital or reduction of share capital.
If this query was raised in practical perspective, I suggest Bilal to write to SECP for clarification for having a legal cover. They may suggest to reduce the dividend rate a little bit so that eroded equity may be repaired to some extent even after paying for the dividend!
Regards,
Kamran.
Thanks a lot to both of u.
"Reply to query 1
The company can pay dividend to the extent of all the accumulated profits keeping the capital unaffected. The current year's loss does not make it illegal"
i would like to take that point further and suppose
Company has current year loss of Rs. 500,000 and accumulated profits of RS.100,000 and hence carry forward losses of Rs.400,000. further assume there is no minimum equity requirement and all other facts as mentioned in my first query be the same.
now what will be your answer with reason.
Bilal,
No dividend can be paid in the case where all of the accumulated profits have been eroded by current year's huge loss.
I know what logical point you want to make out of it. Some 8 years back my mind was also struck by same issues.
I can simply say that for followers, a law (or precedent accepted by law) is something that will govern the practice. Revision of law or challenging to a precedent can be made but a differnt route is required to be adopted for it which if adopted will not give any absolute assurance that what you feel logical will takeover the law or existing precedent.
Anyway, this is entirely another debate. Iftikhar Ch. is there and we can put forth petitions where we feel justified and warranted. (Don't take a serious note of this line).
So conclusion is that in this third situation dividend cannot be paid.
Regards,
Kamran.
The logical point is that the divident is kind of return to the shareholder of organisations investment but it is also be viewd that investors are the Shareholder/owner of entity...
to clear a logic just answer the question that if owner is facing losses that will he demand for drawing.....
in case of company in this context is likely the same.... So will share holder demand when profit is not achieved in other world the company face loss!....
while all the conclusion is very subjective to the company divident policy and retained profit & resources of the company!!!!!!....
Dear,
I could not understand what you wanted to say in your post and to which particular scenario you have discussed.
A reply can only be given if query is clear and understandable.
As far as the answers of all the three scenarios are concerned I firmly stand on what I have opined.
Regards,
Kamran.