A dividend is the distribution out of a company’s profits to it shareholders (members).
Every company has the implied power, subject to any restrictions which may be imposed by the Articles of Association, to apply its profits to the distribution of dividend amongst its members. This is a reflection of the fact that companies are vehicles through which profits are made.
However, there is no legal obligation on the company to pay a dividend, even where there are sufficient distributable profits available, unless the company’s Articles of Association state otherwise.
A shareholder has no right to a dividend while the company is a going concern until the dividend is declared and payable. Once it is declared and payable, the shareholder is entitled to sue the company for arrears of his proportion as a contract debt in the same way as an ordinary creditor of the company may sue for a debt.
A shareholder’s entitlement to a dividend can arise only before a winding up commences. Declared dividends cease to be debts owed by the company once a winding up occurs. The shareholder’s right is deferred until the debts owed to the company’s ordinary creditors have been satisfied.
The Companies Acts do not provide who shall declare a dividend nor do they state when a dividend shall become payable; these are matters of internal management.
Since the recommendation of the general meeting must not exceed the amount, if any, suggested by the Directors, the Directors have the last say as to when a dividend is declared and how much is to be made available. There is no way in which shareholders can force the Directors to recommend a dividend. The general meeting may get around this problem by removing the Directors through an ordinary resolution or by altering the Articles of Association by a Special Resolution.
Dividends are prima facie payable in cash but if the Articles of Association permit, a company may pay them by distribution of non-cash assets such as shares, debentures or specific items of property.
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