Change in law on dividends
Section 254T of the Corporations Act (and earlier equivalents) has long provided that a dividend may only be paid out of the company’s profits. 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.
For directors, there are a number of practical implications including:
- The need for directors to calculate the assets and liabilities of their company
- The effect of paying a dividend on the rights of shareholders (as a whole) and the company's creditors.
- If a company constitution provides (as did the old Section 254T of the Corporations Act) 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.
If you have any questions regarding these legal changes please contact Surry Partners.