The sections, word for word
Every section on this subject, exactly as printed in the Official Gazette (Act No. 3 of 2020). The explanation follows beneath.
Section 426. Declaration of dividends and payment of interim dividend
(1) A company may, in general meeting, declare dividends in respect of any year or other period only on the recommendation of the directors.
(2) The company 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.
(3) The general meeting has power to decrease the amount of dividend recommended by the directors, but has no power to increase the recommended amount.
(4) Where the recommendation of the directors of a company with respect to the declaration of a dividend is varied in accordance with subsection (3) by the company in general meeting, a statement to that effect shall be included in the relevant annual return.
(5) Subject to the provisions of this Act, dividends is payable to the shareholders only out of the distributable profits of the company.
Section 427. Distributable profits
(1) A company may pay dividends only out of profits available for the purpose.
(2) The profits of a company available for payment of dividends are its accumulated, realised profits (so far as not previously utilised by distribution or capitalisation), less - its accumulated, realised losses (so far as not previously written off in a lawfully made reduction or reorganisation of capital).
Section 428. Restriction on declaration and payment of dividends
A company shall not declare or pay dividend if there are reasonable grounds for believing that the company is or would be, after the payment, unable to pay its liabilities as they become due.
Section 429. Unclaimed dividends
(1) Where dividends paid by a company remain unclaimed, the company shall publish in two national newspapers, a list of the unclaimed dividends and the names of the persons entitled to the dividends, and attach the list, as published in the national newspapers, to the notice that is sent to the members of the company for each subsequent annual general meeting of the company.
(2) After the expiration of three months of the publication and notice referred to in subsection (1), the company may invest the unclaimed dividend for its own benefit in investments outside the company and no interest shall accrue on the dividends against the company.
(3) Where dividends have been sent to members and there is an omission to send to some members due to the fault of the company, the dividends shall earn interest at the current bank rate from three months after the date on which they ought to have been posted.
(4) For the purpose of liability, the date of posting the dividend warrant is deemed to be the date of payment and proof of whether it has been sent is a question of fact.
Section 430. Reserve and capitalisation
(1) The directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for any purpose to which the profits of the company may be properly applied, and pending such application may, at the discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the directors think fit, and the directors may without placing the same to reserve, carry forward any profits which they may think prudent not to distribute.
(2) The company in general meeting may upon the recommendation of the directors resolve that it is desirable to capitalise any part of the amount, for the time being, standing to the credit of any of the company’s reserve accounts or to the credit of the profit and loss account or available for distribution.
(3) Such sum may be set free for distribution among the members who would have been entitled to dividends in the same proportions on condition that the same be not paid in cash but be applied either on or towards paying up any amount unpaid on any shares held by such members respectively or paying up in full unissued shares or debentures of the company to be allotted and distributed to creditors as fully paid up.
(4) The company may decide by a resolution, what part shall be distributed in cash or in shares and the directors shall give effect to such resolution.
(5) Share premium account and a capital redemption reserve fund may, for the purposes of this subsection, only be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares.
(6) Where a resolution under subsections (2)-(5) is passed, the directors shall make all appropriations and applications of the undivided profits resolved to be capitalised thereby, and all allotments and issues of fully-paid shares or debentures, if any, and generally do all acts and things required to give effect to it.
(7) The directors shall have power to make such provision by the issue of fractional certificates or by payment in cash or otherwise as they think fit in the case of shares or debentures becoming distributable in fractions.
(8) Any person may be authorised by the directors to enter on behalf of all the members entitled under this section into an agreement with the company to provide for the allotment to them respectively, credited as fully paid up, of any further shares or debentures to which they may be entitled upon such capitalisation, or (as the case may require) for the payment by the company on their behalf, of the amount or any part of the amount remaining unpaid on their existing shares, and any agreement made under such authority is effective and binding on all such members.
Section 431. Employees’ shares and profit sharing
If under his contract of service, an employee is entitled to share in the profits of the company as an incentive, he is entitled to share in the profits of the company, whether or not dividends have been declared.
Section 432. Right of the shareholders to sue for dividends
(1) Dividends are special debts due to and recoverable by shareholders within 12 years, and actionable only when declared.
(2) Dividends that are unclaimed after 12 years should be included in the profits that should be distributed to the other shareholders of the company.
Section 433. Liability for paying dividend out of capital
(1) All directors who knowingly pay, or are party to the payment of dividend out of capital or in contravention of this Part, are personally liable jointly and severally to refund to the company any amount so paid.
(2) Such directors shall have the right to recover the dividend from shareholders who receive it with knowledge that the company had no power to pay it.
What this means
Short answer
A company can pay dividends only out of profits available for the purpose (sections 426 and 427), on the directors’ recommendation, and not if it would be unable to pay its liabilities as they fall due (section 428). Directors who knowingly pay a dividend out of capital are personally liable to refund it (section 433).
Declaring and paying dividends
- A company declares dividends in general meeting only on the directors’ recommendation. The directors may pay interim dividends that appear justified by the profits (section 426(1) and (2)).
- The meeting can reduce the recommended dividend but not increase it. A reduction must be stated in the annual return (section 426(3) and (4)).
- Dividends are payable only out of distributable profits (section 426(5)).
What profits can be distributed
The profits available are the accumulated, realised profits, so far as not already distributed or capitalised, less accumulated realised losses, so far as not written off in a lawful reduction or reorganisation of capital (section 427). A company must not declare or pay a dividend if there are reasonable grounds for believing it is or would, after the payment, be unable to pay its liabilities as they become due (section 428).
Reserves and capitalising profits
Before recommending a dividend, directors can set aside sums as reserves for any proper purpose, or carry profits forward. The company in general meeting can, on the directors’ recommendation, capitalise reserves or profits and apply them to paying up unpaid amounts on shares, or to unissued shares or debentures allotted as fully paid. The share premium account and capital redemption reserve can be applied only to paying up bonus shares. The directors can deal with fractions and authorise an agent to bind the members to the allotment (section 430).
Unclaimed dividends
- The company must publish a list of unclaimed dividends and the names of those entitled in two national newspapers, and attach it to the notice of each later annual general meeting. After three months from the publication and notice, it may invest the unclaimed dividends for its own benefit, and no interest accrues against it (section 429(1) and (2)).
- If dividends were not sent to some members through the company’s fault, they earn interest at the current bank rate from three months after they ought to have been posted. The date a warrant is posted counts as the date of payment (section 429(3) and (4)).
Suing for a dividend
Dividends are special debts due to shareholders and recoverable within 12 years, but actionable only once declared. Dividends unclaimed after 12 years are added to the profits distributable to the other shareholders (section 432). An employee entitled under his contract to share in profits as an incentive is entitled to do so whether or not dividends have been declared (section 431).
Dividends paid out of capital
Directors who knowingly pay, or are party to paying, a dividend out of capital or in breach of this Part are personally liable, jointly and severally, to refund it. They can recover it from shareholders who received it knowing the company had no power to pay (section 433).
Questions and answers
Who recommends a dividend?
The directors. The company in general meeting can declare dividends only on their recommendation, and can reduce but not increase the amount (section 426).
What profits can a company pay dividends from?
Accumulated realised profits not already distributed or capitalised, less accumulated realised losses not written off in a lawful capital reduction (section 427).
How long can a shareholder claim a declared dividend?
12 years. Dividends are special debts recoverable within 12 years, and actionable only once declared (section 432).
Are directors liable for a dividend paid out of capital?
Yes. Directors who knowingly pay one are personally and jointly liable to refund it (section 433).
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