Dividends Payment Rules: Have your say

20 December 2011 | By Sandy Mak (Partner)

Just in time for Christmas, the Treasurer has released a discussion paper on proposed amendments to the dividend payment provisions under the Corporations Act. Many of our clients will recall that, in June 2010, the dividend payment provisions were significantly amended so that companies were no longer required to pay dividends out of profits.

Instead, a new “net asset/solvency test” allowed a dividend to be paid if:

  • a company had sufficient net assets for the payment of the dividend;
  • the payment was fair and reasonable to shareholders; and
  • it did not materially prejudice the company’s ability to pay its creditors.

The new test purported to be a more flexible approach and a departure from the capital maintenance doctrine.  However, the drafting of the section (s254T) and the other ambiguities in the application of the test in fact increased the burden of compliance on companies

The three key problems with s254T (from a corporate and accounting perspective) as presently drafted are:

  1. The net asset calculation is required to be undertaken “immediately” before the dividend, applying accounting standards, resulting in timing difficulties and an increased administrative burden.
  2. It is unclear whether a company can distribute a dividend (not out of profits) without having to seek shareholder approval under the capital reduction provisions of the Act.
  3. The wording of the section refers to a “declaration” of dividends, apparently ignoring the legal implications of “declaring” a dividend (which gives rise to a debt) and the fact that many boards “determine” rather than “declare” dividends.

The discussion paper invites stakeholders to provide their views on four options to address the first of these issues:

  1. No change: i.e. retaining s254T as drafted, which requires net assets to be calculated by reference to the accounting standards.
  2. Adopting a “solvency test”: the net asset/solvency test will be largely preserved with some modifications. Net assets will be calculated having regard to the most recent financial statements or financial records kept by the company (rather than by reference to accounting standards). Additionally, there does not appear to be a requirement that the excess of net assets be sufficient for the payment of the dividend, provided assets exceed liabilities after the dividend is declared.
  3. Reverting to the “profit-based” test: i.e. reinstating the old profit-based dividend test.
  4. Allowing companies to choose between either the “net asset/solvency” test or the “profit test”: a company can choose between the old profit-based test or the “net asset/solvency” test as currently set out in s254T.

The Treasurer has also sought views on whether the Act needs to be amended to clarify the other issues raised in paragraphs B and C above.

We have experienced first hand the practical difficulties that the present dividend provisions have caused our clients and Corrs will be making submissions with respect to the proposed reforms.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Sandy Mak

Partner. Sydney
+61 2 9210 6171