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
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
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
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
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.
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