Monday 2 March 2009

Declare Dividend disregard accumulated losses


Can a company declare dividend out of a profit year and disregard accumulated losses?

  • Companies Act had stipulated that no dividend shall be paid by the company except out of profits [S365(1)].
  • No part of the capital of the company may be distributed as dividen as this would constitute a reduction of capital in a manner not permitted by the law.
  • Profits are calculated by applying prudent accounting standards and practice so as to determine the source of dividends. However, when it comes to deciding whether it is lawful for a company to pay a dividend, profits as calculated under the law will be preferred as there is no legal necessity to make good any losses in fixed capital or depreciation of fixed capital (in accounting, loss or depreciation of fixed assets is allowed for in computing profits) and the profits made in the current financial year can be lawfully distributed by way of dividend without making good trading losses of earlier years.
  • This means that if a company had suffered loss in the past, but has currently made a profit, legally this current profit can be distributed.
  • However, directors are required to exercise reasonable commercial prudence to ensure going concern of the company and therefore, would usually make provisions for the past losses (accumulated losses) to be recovered before a dividend is declared.

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