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DG-WEBSERIES
DIVIDEND – PAST EXAMINATION – QUESTION-ANSWER

1. Write note on - Punishment for failure to distribute dividend and exceptions

June 2016 4 marks

Ans:

As per Section 127 of the Companies Act, 2013, when a dividend has been declared by a company but
has not been paid or the warrant in respect thereof has not been posted within thirty days from the
date of declaration to any shareholder entitled to the payment of the dividend, every director of the
company shall, if he is knowingly a party to the default, be punishable with imprisonment which may
extend to two years and with fine which shall not be less than one thousand rupees for every day
during which such default continues and the company shall be liable to pay simple interest at the rate
of eighteen per cent per annum during the period for which such default continues:

Following are the exceptions to the abovementioned punishment: —

(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been communicated
to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from
the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the
period under this section was not due to any default on the part of the company.

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2. Board of directors of KM Ltd. proposes to transfer 11.3% of the net profits of the company for the
financial year 2015-16 to general reserves. Examining the provisions of the Companies Act, 2013,
advise the Board whether it can go ahead with its proposal.

Dec 2016 4 marks

Ans:

As per first proviso to Section 123 of the Companies Act, 2013, a company may, before the declaration
of any dividend in any financial year, transfer such percentage of its profits for that financial year as it
may consider appropriate to the reserves of the company.

Hence, the Board of Director of K.M. Limited may transfer 11.33% of net profit to general reserve

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3. Rise Ltd., a company with diversified interests, has constituted Investor Education and Protection
Fund as required under the provisions of the Companies Act, 2013. The company has so far not
deposited any amount to the fund. The President (Finance) has asked you, the Company Secretary,
to submit a note on amounts payable to the credit of the fund and the period within which amount
shall be paid. Prepare the said note.

Dec 2016 4 marks

Ans -

NOTE ON INVESTOR EDUCATION AND PROTECTION FUND (IEPF)

Kind attention: President (Finance)
Dear Sir,

Sub: Details on amount payable to Investor Education & Protection Fund constituted
As per Section 125(1) of the Companies Act, 2013, the Central Government shall establish a Fund to
be called the Investor Education and Protection Fund (Fund), AND not the company.

According to Section 125(2) of the Companies Act, 2013 the following amounts shall be credited to
the Fund established by the Government by the company:
(a) the amount given by the Central Government by way of grants after due appropriation made by
Parliament by law in this behalf for being utilised for the purposes of the Fund;
(b) donations given to the Fund by the Central Government, State Governments, companies or any
other institution for the purposes of the Fund;
(c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-
section (5) of section 124;
(d) the amount in the general revenue account of the Central Government which had been transferred
to that account under sub-section (5) of section 205A of the Companies Act, 1956, as it stood
immediately before the commencement of the Companies (Amendment) Act, 1999 and remaining
unpaid or unclaimed on the commencement of this Act;
(e) the amount lying in the Investor Education and Protection Fund under section 205C of the
Companies Act, 1956;
(f) the interest or other income received out of investments made from the Fund;
(g) the amount received under sub-section (4) of section 38;
(h) the application money received by companies for allotment of any securities and due for refund;
(i) matured deposits with companies other than banking companies;
(j) matured debentures with companies;
(k) interest accrued on the amounts referred to in clauses (h) to (j);
(l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and
amalgamation for seven or more years;
(m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years;
and
(n) such other amount as may be prescribed:

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Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such
amount has remained unclaimed and unpaid for a period of seven years from the date it became
due for payment.
This is for your information and record please.
Best Regards
_________________
Company Secretary
4. Board of Directors of AVB Limited wants to declare dividend Rs. 15 lakh out of capital profits for the
year ended 31st March, 2017, without making a provisions for depreciation. Referring to the
provisions of the Companies Act, 2013, you being the Secretary of the Company advise the board
whether it can go ahead with its proposal?

June 2017 4 marks

Ans:

As per Section 123(1) of the Companies Act, 2013, a company can declare and pay dividend out of 3
sources:

1. Current year profits (i.e. profit after tax and statutory reserves.)
2. The accumulated profits of the preceding Financial Years. [i.e. from P&L (Cr.)] – [Not from general
reserves or free reserves].
3. The funds provided by C.G. / S.G. for payment of dividend pursuant to any guarantee given by the
C.G. / S.G. to the company
Current year profits means the revenue profits earned from the business activity, and does not
include the capital profits earned from sale of capital assets etc.

Further, Section 123(2) provides that the company shall make provisions for depreciation before
declaring any dividend out of current year profits in accordance with the provisions of Schedule II.
Hence, in the present case, AVB Limited can neither declare dividend out of Capital Profits nor it can
declare dividend without making provision for depreciation

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5. The Board of Directors of American Express Ltd. declared interim dividend third time during the
financial year 2015-16. After declaration, the Board of Directors decided to revoke third interim
dividend as they noticed that company’s financial position did not permit payment of such interim
dividend. The Board of Directors seek your advice in this matter. Please advise the Board as a
Company Secretary. Will your advice be different in case it was a regular dividend instead of interim
dividend?

Dec 2017 4 marks

Ans:

As per definition of ‘Dividend’ under Section 2(35) of the Act, "dividend" includes any interim dividend

Further, Section 123(4), provides that, the amount of the dividend, including interim dividend, shall be
deposited in a scheduled bank in a separate account within five days from the date of declaration of
such dividend

The Act doesn’t provide anything for revocation of declared dividend and the dividend once declared,
becomes debt for a Company and a shareholder is entitled to sue for recovery of the same after expiry
of the 30 days from the declaration as mentioned under Section 127.

Therefore, the interim dividend once declared cannot be revoked except with the consent of the
shareholders.

Based on aforesaid facts, Board of directors of American Express Limited cannot revoke the interim
dividend and should pay the same.

No, Regular dividend also cannot be revoked even by the shareholders. It’s a statutory debt against
the company once it is declared.

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6. The Board of Directors of Peculiar Ltd. proposes to recommend a final dividend of Rs 25 each to all
the equity shareholders of the company. The company seeks your opinion on the following:

(1) The company wants to deposit the dividend amount to co-operative bank.
(2) The company is a defaulter in the repayment of deposits and proposes to repay its all deposit
after the payment of dividend within 10 days.
(3) Dividend will be declared out of the capital reserves of the company.
(4) The company wants to pay such dividend through the cash counter by way of cash voucher.

June 2018 4 marks

Ans:

(1) As per Section 123(4) of the Companies Act, 2013, the amount of the dividend, including interim
dividend, shall be deposited in a scheduled bank in a separate account within five days from the
date of declaration of such dividend

Hence, the Company has to ensure that such co-operative bank should be a scheduled bank, then
it can deposit dividend in such co-operative bank

(2) As per Section 123(6) of the Companies Act, 2013, a company which fails to comply with the
provisions of sections 73 and 74 [repayment of deposits] shall not, so long as such failure
continues, declare any dividend on its equity shares

Therefore, the Company can declare dividend AFTER repayment of deposits and make the default
good. Dividend can’t be declared as long as company is in default of repayment of deposits.

(3) As per third proviso to Section 123(1) of the Act, no dividend shall be declared or paid by a company
from its reserves other than free reserves.
Further, as per Section 2(43), Free reserves means such reserves which, as per the latest audited
balance sheet of a company, are available for distribution as dividend: Provided that—
(a) any amount representing unrealised gains, notional gains or revaluation of assets, whether
shown as a reserve or otherwise, or
(b) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair value,

shall not be treated as free reserves;

Therefore, dividend cannot be declared out of the capital reserves of the company.

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(4) As per Section 123(5) of the Act, dividend shall not be paid by a company in respect of any share
therein except to the registered shareholder of such share or to his order or to his banker and shall
not be payable except in cash.

Therefore, proposal of the Company to pay dividend through the cash counter by way of cash
voucher is strictly prohibited.

7. X is a shareholder of Company A. At the AGM held on 27th Sep. 2018, Company A declared a Dividend
of Rs 20 per equity share. X wrote to the company saying that he does not want to take the dividend
and advised the company not to send the dividend amount. Comment whether the waiver of
dividend by X is tenable under the provisions of the Companies Act, 2013?

Dec 2018 OS 5 marks

Ans:

The receipt of dividend is a right of shareholder and not an obligation. The Companies Act, 2013 is
silent regarding provisions relating to waiver of dividend by a shareholder. Hence, such provisions may
be contained in the articles of the company.

The Articles of Association of the company must contain a clause in regard to this where the
shareholder has the right to waive the right to receive dividend, either final or interim, to which it is
entitled, on some or all the shares held in the company.

However, it is pertinent to analyse the time period, as to when can a shareholder exercise his right to
waive dividend in case of final or interim dividends.

In the case of interim dividend, right to claim dividend will only arise once it has been declared by the
board of directors of the company.

Normally the directors have authority to pay an interim dividend without reference to the
shareholders. If the directors resolve to pay an interim dividend, that resolution gives no rights to the
shareholders.

An interim dividend is of no effect until the money is actually paid to the shareholders.

Hence, shareholders of the company can waive their right to receive interim dividend once the same
is declared by the company.

In case of final dividend, board of directors recommend the payment of dividend after complying with
the statutory provisions, and the same is then approved by the shareholders of the company at the
AGM. Hence, shareholders of the company can waive their right to receive dividend once the same is
proposed by the board of directors of the company but before it is declared.

The difference between the two waivers exercised at different point of time is because, in case of
unclaimed interim dividend, which has been declared, creates no debt or liability upon the company
but such is not the case when it comes to declared unclaimed final dividend.

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The dividend waiver must be formally executed and signed by all the shareholders who wish to waive
their share of dividend and waiver provisions should have mention in the Articles of Association of
the company for shareholders who want to waive the right to receive dividends in respect of any
financial year as mentioned above.

8. Distinguish between the following:

Unpaid Dividend Account Vs. Consequences of Non-Transfer of Dividend to unpaid dividend

account.

Dec 2018 OS 4 marks

Ans:

Unpaid Dividend Account

As per Section 124(1) of the Companies Act, 2013, when a dividend has been declared by a company
but has not been paid or claimed within thirty days from the date of the declaration to any shareholder
entitled to the payment of the dividend, the company shall, within seven days from the date of expiry
of the said period of thirty days, transfer the total amount of dividend which remains unpaid or
unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to
be called the Unpaid Dividend Account.

Consequences of Non-Transfer of Dividend to unpaid dividend account

As per Section 124(3) of the Act, if any default is made in transferring the total amount referred to in
Section 124(1) or any part thereof to the Unpaid Dividend Account of the company, it shall pay, from
the date of such default, interest on so much of the amount as has not been transferred to the said
account, at the rate of twelve per cent per annum and the interest accruing on such amount shall
ensure to the benefit of the members of the company in proportion to the amount remaining unpaid
to them.

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9. A company declared dividend on 21st November, 2018. It reports on 22nd December, 2018 that it
could not pay dividend to 46 members as they are not traceable for last three years. Advise the
company with regard to unpaid dividend under the provisions of the Companies Act, 2013.

Dec 2018 NS 3 marks

Ans:

In accordance with Section 124(1) of the Companies Act, 2013, when a dividend has been declared by
a company but has not been paid or claimed within thirty days from the date of the declaration to any
shareholder entitled to the payment of the dividend, the company shall, within seven days from the
date of expiry of the said period of thirty days, transfer the total amount of dividend which remains
unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled
bank to be called the Unpaid Dividend Account.

In the present case, dividend was declared on 21st November, 2018 and at the expiry of 30 days i.e. on
22nd November, 2018, dividend remained unpaid to 46 shareholders as they are not traceable.

The Company shall deposit the total amount of unpaid dividend to a special account opened in any
scheduled bank to be called the “unpaid dividend account” within 7 days from 21st December, 2018
i.e. by 28th December, 2018.

Further, as per Section 124(5) of the Act, any money transferred to the Unpaid Dividend Account of a
company, which remains unpaid or unclaimed for a period of seven years from the date of such
transfer shall be transferred by the company along with interest accrued, if any, thereon to the Investor
Education and Protection Fund.

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10. Referring to the provisions of Companies Act, 2013 advice a public company which declared dividend
on 30th September, 2018 as to the procedures to be followed in this regard for payment of dividend.
Whether any intervening holidays in the month of October 2018 shall be taken into account in
calculating the time limit?

June 2019 NS 3 marks

Ans:

In the present case, following shall be the procedure for payment of dividend:

S. No. Provision of the Companies Act Timeline

Date of declaration of Dividend – September 30, 2018
1 As per Section 123(4), the amount of the dividend, including By 5th October, 2018
interim dividend, shall be deposited in a scheduled bank in a
separate account within five days from the date of declaration of
such dividend
2 As per Section 124(1), the Company shall despatch dividend within By 30th October, 2018
30 days of declaration.
3 As per Section 124(1), if any amount of dividend, which is still By 7th November, 2018
unpaid or unclaimed, the company shall, within seven days from
the date of expiry of the said period of thirty days, transfer the
total amount of unpaid/unclaimed dividend to a special account
to be opened by the company in that behalf in any scheduled bank
to be called the Unpaid Dividend Account.
4 Any money transferred to the Unpaid Dividend Account of a 7TH Nov 2025 + 30 days
company, which remains unpaid or unclaimed for a period of extra given by MCA
seven years from the date of such transfer shall be transferred by circular
the company along with interest accrued to IEPF

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11. (i) Draft specimen of a board resolution recommending payment of dividend on equity shares out of
current profits of JAK Ltd., a company which is in existence for more than ten years. Assume facts
and figures.

(ii) The Board of Directors of Prince Ltd. passed a resolution at its 50th meeting for recommending
declaration of dividend out of reserves. Prepare specimen extracts of minutes containing the board
resolution. Assume facts and figures.

Dec 2019 OS 8 marks

Ans:

(i) DRAFT BOARD RESOLUTION FOR PROPOSING THE PAYMENT OF DIVIDEND

“RESOLVED THAT pursuant to Section 123 of the Companies Act, 2013 read with the Companies
(Declaration and Payment of Dividend) Rules, 2014 and subject to approval of the members at the
Annual General Meeting, the Directors of the Company do and hereby recommend a dividend at the
rate of Rs. _____ per share out of the current profits of the year on ______ Equity shares to those
shareholders whose names stand in the register of members as on _____________.

RESOLVED FURTHER THAT Mr._____________, Managing Director, Mr.

___________________Director (Finance) or Mr. ________________, Company Secretary be and are
hereby authorized severally to deposit the dividend amount within 5 days from the date of declaration
to a separate bank account opened for that purpose and to comply with any other legal requirement
in this regard including taking all necessary steps to ensure remittance of the dividend amount to the
shareholders.”

(ii) SPECIMEN EXTRACTS OF MINUTES CONTAINING THE BOARD RESOLUTION FOR

RECOMMINDING DIVIDEND OUT OF RESERVES

The Chairman informed the Board that the profits of the current year, i.e. the financial year ended on
the 31st March, 2020 are inadequate for payment of a reasonable amount of dividend to the members
of the company.

He further informed that the free reserves of the company do, however, permit the distribution of
dividend not exceeding the average of the rates at which dividend was declared by it in the three years
immediately preceding that year.

The directors considered the matter and passed the following resolution:

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“RESOLVED THAT the Board of directors of the company do hereby recommend to the members of
the company, the declaration and payment of a dividend at the rate of _______ per cent on all the
fully paid equity shares of the company out of the free reserves of the company that stood in the books
of the company on............ 2020 absorbing a total of............., with due compliance of the Companies
(Declaration and Payment of Dividend) Rules, 2014, and that, subject to the declaration by the
members at the forthcoming annual general meeting, to the holders of the equity shares whose names
will appear on the register of members on .................2020

RESOLVED FURTHER THAT Mr._____________, Managing Director, Mr.

___________________Director (Finance) or Mr. ________________, Company Secretary be and are
hereby authorized severally to deposit the dividend amount within 5 days from the date of declaration
to a separate bank account opened for that purpose and to comply with any other legal requirement
in this regard including taking all necessary steps to ensure remittance of the dividend amount to the
shareholders.”

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12. While adopting accounts for the year, the Board of directors of Prima Ltd. decided to consider the
interim dividend @ 12% as final dividend and did not consider transfer of profit to reserves. Explain
whether decisions of the Board were justified referring to relevant provisions.

Dec 2019 NS 3 marks

Ans:

As per definition of ‘Dividend’ under Section 2(35) of the Act, "dividend" includes any interim dividend

Section 123 of the Companies Act, 2013 provides for the provisions relating to declaration of dividends.

Since interim dividend is also a dividend, companies shall provide for depreciation under section 123 of
the Companies Act, 2013 before declaration of interim dividend.

However, the first proviso to the section 123(1) of the Companies Act, 2013 provides that a company
MAY, before declaration of any dividend in any financial year, transfer such percentage of its profits for
that financial year as it considers appropriate to the reserves of the company irrespective of the size of
declared dividend i.e. company is not mandatorily required to transfer the profit to reserves, and it is
only an option made available to the company to transfer such percentage of profit to reserves.

In the instant case, the Board has decided to pay interim dividend @12% of the paid up capital.
Assuming the company has complied with the depreciation requirement and other applicable
provisions, the interim or final dividend can be declared without transferring such percentage of its
profits as it may consider appropriate to the reserve of the company.

Thus, from the facts and provisions, it may be concluded that Prima Ltd is under no violation of law by
not transferring i.e. the company is free to transfer any amount of its profit to the reserves, without
any compulsion or restriction before declaration of any dividend.

Section 123(3) of the Companies Act, 2013 provides that the Board of Directors of a company may
declare interim dividend during any financial year or at any time during the period from closure of
financial year till holding of the annual general meeting out of the surplus in the profit and loss account
or out of profits of the financial year for which such interim dividend is sought to be declared or out of
profits generated in the financial year till the quarter preceding the date of declaration of the interim
dividend.

The amount of dividend including interim dividend should be deposited in a separate bank account
within five days from declaration of such dividend for compliance of section 123(4) of the Companies
Act, 2013.

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