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Navdeep Kaur
| Updated: 26 Mar, 2020 | Category: Compliances, Finance & Accounting

Punishment for Failure to Distribute Dividends

Distribute Dividends

As per the provisions of Section 123 of the Companies Act, 2013, a company which has been incorporated as per the provisions of Companies Act except a company incorporated under Section 8 may declare its dividend. In case if a company fails to pay a dividend within the prescribed period as defined in the law, there are certain repercussions that company may have to face. Here in this article, we shall discuss the definition, meaning and consequences of not paying the dividend on time.

What is the definition of dividend?

The term ‘dividend’ has been defined under the provisions of Section 2(35) of the Companies Act, 2013[1]. This term has its origin from the Latin word ‘Dividendum’ which means things which are meant to be divided. In simple words, it means net profit proportion of the company which is not maintained by the company. This profit is further dispersed among the shareholders of the company as per their shareholding proportion.

Section 2(35) of the companies act, 2013 has defined the term dividend as which includes any interim dividend. In other words, it means:

  • Which is share proportion diffuse amidst shareholders
  • Profit-sharing regardless on fix rate or a variable one
  • It can be paid on preference or equity share

When are dividends paid?

Dividends are to be payable by a company at its annual general meeting. Company declare that for a particular financial year once the final accounts and amount to be distributed among various shareholders is finalized and is available for further distribution. Final dividend for a particular financial year needs to be declared on recommendation given by the Board of Directors (BOD) at annual meeting. But in contrast, Interim is to be paid amidst two (2) annual general meetings by company without even declaration by Board of Directors (BOD). The rate of amount is to be decided and declared by Board of Directors in annual general meeting, and that rate cannot be exceeded the rate as recommended by the board. Once the dividend amount is declared by company it becomes debt for the company that company has to pay to its shareholders. But before declaration, company need to adopt the account of books first, which is prerequisite before a declaration. In case company fails to pay the declared amount to shareholders in prescribed time, shareholders have the authority to file a suit against company for recovery of amount due against dividend.

Who all have the privilege to declare dividend?

As per the provisions of the companies act, 2013 all companies which are registered under companies act except companies incorporated and registered under Section 8 can declare dividend. Companies registered under Section 8 such as Not-for-profit entity cannot declare dividend as per provisions of the act as its main intent is a non-profit organization.

Read our article:How to Effectively Improve Cash Flow Management in Business?

Important provisions related to the dividends:

Companies Act, 2013 Matters dealt with
Section 2(35) Definition of ‘Dividend’ is which includes any interim dividend
Section 51 Payment of dividend in proportion to amount paid-up: The company can make payment of dividend if authorization by articles is given to the amount of paid-up of each shareholding assigned.
Section 91 rights to close registration of debenture or holders or members security holders
Section 123 Need to file a declaration of disbursement of dividend
Section 124 Unpaid dividend needs to be transferred in dividend account.
Section 126 Right to dividend, share and bonus shares rights to be held in suspension pending registration to transfer shares
Section 127 Punishment in case failure to disperse dividends

Procedure to be followed for dividends declaration:

  • Issuance of 7 days advance notice period under Section 173 of the companies act, 2013 for an annual financial meeting of the board of directors
  • Advance 2 days notice to the stock exchange where company’s securities are places in case of a listed company
  • The resolution needs to be passed in an annual board meeting for dividend division and issuance
  • Prepare a statement of dividend
  • To ensure that annual dividend tax is paid to the concerned authority
  • Open a separate bank account for dividend division
  • Transfer dividend to shareholders as per their shareholding pattern

The penalty in case of failure disperse dividend

In case if a company doesn’t comply with the provisions of Companies Act and fails to distribute dividend among its shareholders, then penalty can be imposed on company. As per the provisions of the companies act, 2013 under section 127 of the companies act, 2013 in case a company fails to make payment of the dividend within a prescribed period of 30 days from the time of declaration of dividend then company, as well as director, can be penalized as mentioned below:

Imprisonment Penalty
For a Company N/A Interest amount @ 18% per annum from the date of default
For a director of the company Imprisonment up to 2 years or/and Fine of Rs. 1000/- per day from the date of such default

For a company fine can be imposed in terms of interest @ 18% per annum from the date of default, and it is also applicable for a director who is also a criminal offence which may lead to imprisonment up to a period of 2 years along with fine of Rs. 1000/- per day for the entire default period.

Is there any exception to the penalties, as mentioned under Section 127 of the Companies Act?

There are certain exceptions that have been given to the companies which don’t comply with the provisions of Section 127 of the Companies Act, 2013 as mentioned below:

  • In a scenario where company is not able to pay dividend due to any issue in operation of law;
  • When directions have been given by shareholder to the company regarding the division of dividend but that directions cannot be followed due to certain reasons and same has been informed to him;
  • When dividend part of a shareholder has been adjusted by company against payment already done to him
  • When there is a dispute in regards to the division or payment of dividend among shareholders or company and the same is pending for resolution
  • When a company has complied with all the provisions of law w.r.t. to dividend, and there is no fault from company side

Conclusion:

Many provisions have been made in order to avoid any default in regards to division and payment of dividend. Even nonpayment of the dividend within prescribed time has been made a criminal offence along with penalty in case of shareholders. But still, there are many companies which still avoid these provisions. Although certain exceptions are also given still, it is the responsibility of every company and individual shareholders to follow the provisions of law w.r.t to dividends division and payment.

Read our article: Investor Education and Protection Fund- IEPF

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Navdeep Kaur

Navdeep is working as legal counsel in Enterslice group companies having more than 4 years of experience. She has expertise in legal, corporate and regulatory matters.

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