Royal assent was recently given to the Corporations Amendment (Corporate Reporting Reform) Act 2010. This legislation amends a number of provisions of the Corporations Act 2001 (Cth) (Corporations Act) dealing with financial reporting requirements of companies. In particular, a Corporations Act provision dealing with the payment of dividends has substantially changed.

Section 254T of the Corporations Act (and earlier equivalents) has long provided that a dividend may only be paid out of profits of a company. The section has been replaced with a new provision which essentially prohibits a company from paying 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.

This marks a significant change in the legal framework for the determination of dividends, however it has also raised a number of questions and potential areas of uncertainty.

For directors, there are a number of practical implications that flow from this amendment, including:

  • whether dividends must first be 'declared' by directors (rather than the directors simply having the power to 'determine' dividends without being under an express requirement to make a declaration under the company's constitution);
  • whether directors must calculate the assets and liabilities of their companies in accordance with the relevant accounting standards in force at the time; and
  • the effect of paying a dividend on the rights of shareholders (as a whole) and the company's creditors.

We will be holding a seminar to discuss these amendments and their likely implications, as well as to provide an update on a corresponding amendment to the Income Tax Assessment Act 1936 (Cth).

As an immediate priority, it is extremely important that all directors review their company's constitution to ascertain whether it should be updated as a consequence of the recent legislative amendment relating to the payment of dividends. In particular:

  • if a company constitution provides (as did the old section 254T) that a dividend may only be paid out of profits, the directors should consider an amendment to the constitution to ensure that the company has the ability to pay dividends as contemplated under the new Corporations Act provision; and
  • if a company constitution requires directors to 'declare' dividends, the directors should seek legal advice as to whether this should be amended. If the constitution requires that dividends must be 'declared', a debt becomes owing to the shareholders at the time of the declaration (as opposed to debts becoming owing on and from the date set for payment of the dividend).

Please contact a member of our Corporate & Commercial team if you would like to discuss the impact of change to the law on dividends, particularly in light of your company's constitution.

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.