The rules concerning payment of dividends have changed. Assuming
the constitution of the company allows, a company may pay a
dividend if the company's assets exceed its liabilities
immediately before the dividend is declared, the excess is
sufficient for the payment of the dividend, the payment of the
dividend is fair and reasonable to the company's shareholders
as a whole and the payment of the dividend does not materially
prejudice the company's ability to pay its creditors. Many
constitutions mirror the old law, and provide that the company may
only pay dividends out of profits. Companies should consider
amending their constitutions to reflect this important change.
The old 'Profits Test' versus the new Three Tiered
Under the old legislation, section 254T of the Act applied a
'profits test' whereby dividends could "only be paid
out of profits of the company". This approach was based on a
capital maintenance concept where companies kept intact their
initial capital base together with any subsequent capital
The new test has been introduced to enhance the flexibility in
paying a dividend and reflects a shift in focus away from the old
capital maintenance concept towards a more solvency based approach.
The new section 254T applies to all dividends declared after 28
A company may no longer pay a dividend unless:
the company's assets exceed its liabilities immediately
before the dividend is declared and the excess is sufficient for
the payment of the dividend
the payment of the dividend is fair and reasonable to the
company's shareholders as a whole, and
the payment of the dividend does not materially prejudice the
company's ability to pay its creditors.
Assets and liabilities for this purpose are to be calculated in
accordance with accounting standards in force at the relevant
How do these changes affect your company?
Dividends can now be paid other than out of profits which may
make it easier for some companies to pay a dividend. This includes
companies in start up which do not have accounting profits and
those with profits that have been affected by non-cash expenses. In
comparison, a company that has a profit but with a deficiency in
net assets will no longer be able to declare a dividend to its
Companies should consider whether amendments to the provisions
in their constitutions regarding dividends should be sought at the
next annual general meeting. Many constitutions provide that the
company may only pay dividends out of profits. Companies should
consider amending their constitutions to:
remove rules which restrict payments of dividends only from
permit directors to determine the time and amount of a dividend
(if the constitution does not already allow such a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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