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DIVIDENDS UPDATE – PART 1

18 Apr

Under the Companies Act 37 of 1973, the payment of dividends was regulated under section 90.  In terms thereof, a company could pay dividends to its shareholders in their capacities as shareholders, provided that its Articles of Association authorised such payment.

The Companies Act of 2008 (“the Act”), which replaced the Act of 1973, is currently the applicable legislation regulating any and all distributions made by companies.  Under the Act distributions are now more strictly controlled. 

In terms of section 1 of the Act, a distribution is defined as a “direct or indirect transfer by a company of money or other property of the company, other than its own shares, to or for the benefit of one or more holders of any of the shares, … of that company … whether in the form of a dividend, … but does not include any such action taken upon the final liquidation of the company.”

Based on the above, the payment of a dividend clearly falls within the ambit of a distribution.  Distributions are regulated by section 46 of the Act, which sets out the requirements that need to be complied with in order for a distribution to be lawful.  A distribution may only be made if:

1)     unless a distribution is made pursuant to a court order or an existing legal obligation, the board of   directors has authorised same by means of a resolution (section 46(1)(a)); and

2)     it reasonably appears that the company will satisfy the solvency and liquidity test immediately after the proposed distribution has been completed (section 46(1)(b); and

3)     by means of a resolution, the board of the company has acknowledged that it has applied the solvency and liquidity test … and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution (section 46 (1)(c)).

It is therefore not necessary for the company’s shareholders to authorise a distribution during a general meeting by passing an ordinary or special resolution.  The solvency and liquidity test is set out in section 4 of the Act.  In terms of section 4(1)(a) of the Act, the company must consider “all reasonably foreseeable financial circumstances of the company at that time” when applying this test.  To satisfy the solvency test, the company’s assets, fairly valued, must equal or exceed the fairly valued liabilities of the company.  In order to satisfy the requirements of the liquidity test, it must appear that the company is able to settle its debts as they become due in the ordinary course of business for a period of 12 months after the particular distribution has been completed.

Once the abovementioned test has been applied and satisfied, the distribution must be made within 120 days.  Should the distribution not be effected within this period, the board will have to pass a new resolution in respect of the distribution and apply the solvency and liquidity test once again.

Should it become evident that the distribution in fact did not comply with the section 46 requirements or the solvency and liquidity test, the directors, who were present at the meeting where the distribution was approved, will be held liable.  These directors can only be held liable if they voted in favour of the specific distribution, despite knowing that same does not comply with the abovementioned requirements.  These directors will be held personally liable for not more than the extent of the unauthorised amount so distributed.

 
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Posted by on 18/04/2012 in Content

 

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