Board Minutes, Dividend Vouchers and Dividend Waivers Practical Procedures for Paying Dividends
The payment of dividends is governed by the company's Articles of Association.
The Companies Act stipulates that "the company can only distribute the profits available for that purpose". Dividends or distributions to shareholders can only be drawn from profits available for that purpose.
This means that the company needs to have enough retained profits (cumulative realized profits less cumulative realized losses) to cover the dividend on the payment date.
The company should have sufficient retained profits to pay the same dividend rate to all shareholders, including shareholders who waive their rights to dividends.
Any dividends in excess of that profit, paid out of capital or in the event of a loss, are "ultra vires" and indeed "illegal".
If the company goes into liquidation, there could be significant consequences for paying "illegal" dividends. If it is found that dividends were paid to the directors who are shareholders "illegally" in the three years prior to bankruptcy, the directors may be required to repay the same dividends to the company.
Declaring dividends
There are two types of dividends: interim and final.
Interim dividends are dividends paid throughout the year (monthly, quarterly, yearly, etc.). Before declaring an interim dividend, the directors must ascertain that the financial position of the company is sufficient to pay such dividend out of the profits available for distribution. The general meeting of shareholders must not interfere with the exercise of the directors' power to pay an interim dividend. Note that the date of payment of interim dividends is the date of entry in the company's books.
For interim dividends, full accounts are not required. However, the directors will need to have sufficient information available so that they can reasonably judge whether the amount of "distributable profits" at the date of payment is acceptable.
Final dividends are paid annually after the end of each year. If a final dividend is declared and the resolution fixes a later payment date, then that declaration creates a liability to shareholders. However, shareholders cannot take any steps to enforce payment until the payment due date (or dates in the case of fixed installments). In this case, the "due due" date is the established payment date, not the declaration date.
Before a dividend is declared, company directors are required to call a board meeting and keep minutes of the meeting (in paper or electronic format) with their statutory records.
Issuing dividend vouchers
For every dividend issued by a company, a voucher must be created and given to shareholders. This voucher provides the following details about the dividend:
Name of company
Company registration number
Date of issue
Name and address of shareholder receiving the dividend
Share class
Amount of the dividend payment
Signature of authorising officer.
Dividend waiver
If a shareholder decides to waive his right to receive dividends, he must do so by a formal deed before the payment date.
The Deed of Waiver must be signed by the shareholder, must be witnessed, and returned to the company. Another solution to dividend waivers is for companies to issue different classes of shares.
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