Dividends are the profits of a trading company distributed among the members in proportion to their shares.
Although commercial companies are formed to distribute their profits to shareholders by way of dividends, a company is not bound to do so.
The dividend must be formally declared in the Annual General Meeting.
Dividends on ordinary shares vary with the amount of profit made by the company at the discretion of the directors.
Dividends on preference share are usually at a fixed rate and unless otherwise stated, preference shares dividends are presumed to be cumulative i.e. the unpaid dividends can be carried forward to be paid out of profits of subsequent years.
Payment of dividends out of capital
Generally, dividends must not be paid out of capital, i.e money raised by the issue of share debentures.
The Act creates an except to the above rule and provides that where shares are issued to defray/pay up cost of work’s, building or a plant which cannot be made profitable for a long period, the company may pay interest on the amount of capital paid up m respect of such shares and may charge the same to capital as part of the cost of works, buildings or plant provided that:
- No such payment shall be made unless it is authorized by a special resolution and a previous sanction of the Registrar
- The Registrar appoints a person to inquire and report to him as to circumstances of the case the case and the company must meet the cost of inquiry.
- The payment of interest shall be made only for such period as may be determined by the registrar and in no case beyond 6 months following the half year of the actual completion of the plant.
- The rate of interest must not exceed 5% p.a. or any other rate as the AG may prescribe in the gazette.
- The payment of interest shall not operate as a reduction of capital.
- A part from the exceptions under the Act, if a dividend is improperly paid out of capital, all directors who were knowingly partly to such payment are jointly and severally liable to repay to the company the amount so paid with interest. The directors may also recover from each shareholder the dividends so received by him if he knew that it was paid out of capital
General Rules Regarding Declaration and Payment of Dividends
The following are the general rules regarding declaration and payment of dividends:
- Dividends can only be paid out of profits and not out of capital so as to prevent reduction of capital of the company
- Dividend is declared by a resolution passed at the Annual General Meeting. The directors propose the dividend rate but this must be confirmed by the shareholders in the annual General Meeting.
- Dividends cannot be declared if this would result in the company being unable to pay its debts as they fall due.
- Dividends only payable in cash unless otherwise provided in the articles.
- A company may if so authorized by its articles, pay dividends in proportion to the amount paid on cash shares where the amount paid up on some share is more than on some others
- Unrealised profits cannot be declared or distributed by way of dividends.
- A realized profit on the sale and or revaluation of fixed assets may be treated as profit available for dividend.
- Losses in the circulating assets in the current year (not previous year) must be made good before a dividend can be declared.
- Where the dividend has been declared but has not been paid or the warrant has not been posted within 28 days from the date of declaration of the dividend to any shareholder entitled to payment,every director knowingly party to the default is punishable by fine.
- An interim dividend (declared between two (2) Annual General Meetings) may be paid by the director without the sanction of the Annual General Meeting.
- A dividend once declared becomes a debt on the company and each shareholder is entitled to sue the company for its recovery.