Company dividends - The Government rethinks

Less than two and a half years after amending s.254T of the Corporations Act to regulate the circumstances in which a company may declare a dividend, the Federal Government is now foreshadowing a further amendment to the section.  The foreshadowed amendment will vary those circumstances somewhat.

By a media release of 14 December 2012, the Parliamentary Secretary to the Treasurer has given notice of a proposed Bill, the Corporations Legislation Amendment (Remuneration Disclosures and other Measures) Bill 2012.  The draft Bill deals principally with issues concerning remuneration of directors and tribunal members, but amendments to s.254T have been included.

Background

The 2010 amendments to s.254T of the Corporations Act (which became effective on 28 June 2010) provided that a company could not pay a dividend unless:

• The company’s assets exceeded its liabilities before the dividend was declared, and the excess was sufficient to cover payment of the dividend; and

• The dividend was fair and reasonable to the company shareholders as a whole; and

• The dividend did not materially prejudice the company’s ability to pay its creditors.

The amended s.254T provided also that assets and liabilities of the company were to be calculated for the purposes of the section in accordance with the accounting standards enforced at the relevant time.

The 2010 amendments generated significant legal discussion.  Some commentators argued that, rather than making the dividend issue clearer, the new s.254T had raised further unresolved legal difficulties.

Draft Bill

The draft Bill now released varies the 2010 provisions of s.254T to provide as follows:

• A dividend may not be declared unless, immediately before the declaration,

  • The company’s assets exceed its liabilities, and the excess is sufficient to cover the dividend; and

  • The directors of the company reasonably believe that the company will, immediately after the dividend is declared, be solvent.

• A dividend may not be paid unless, immediately before payment,

  • The company’s assets exceed its liabilities, and the excess is sufficient to cover the dividend; and

  • The directors of the company reasonably believe that the company will, immediately after payment, be solvent.

• For the purposes of the calculating a company’s assets and liabilities, these are to be calculated:

  • where the company is required to prepare a financial report, in accordance with one or more of the accounting standards in force at the time, and

  • otherwise, in accordance with the financial records of the company.

It may be significant that the provisions in the draft Bill appear to have dropped the earlier requirements that:

• A dividend being paid be fair and reasonable to the company shareholders, and

• The dividend payment not materially prejudice the company’s ability to pay its creditors.

Future of the Bill

The media release of 14 December 2012 requires public submissions on the draft Bill by (perhaps appropriately) the Ides of March 2013.

It will be interesting to see whether the final Bill presented to Parliament diverges at all from the draft Bill now released, and whether the new s.254T comes to be seen as better regulating the payment of dividends.

If you have any questions regarding this article, please contact Michael Cossetto.

Author: Chris McCaffery