Your Simple Guide on Allocating Company Profits to Shareholders
When it comes to the word “dividend”, that term usually pertains to those well familiar in both stocks and stock trading. But as company owners, how much do we know as to when we’re able to distribute stocks to shareholders while staying in compliance with the principles of Company Act 2016?
This article is written with the purpose of providing practical insight into such conduct. With that, let’s begin…
Dividends are defined as profit appropriation of a Sdn. Bhd. (Sendirian Berhad) company to its group of shareholders.
Like our earlier explanation on stockholders, shareholders are rewarded a share of the profits accumulated by the company they had investing in as a means of return on investments , especially in seasons of financial success for the corporate entity.
Distribution of Dividends
However, the act of dividend distribution is not as simple as just handing out sweets to children. In fact, according to Companies Act 2016 (CA 2016), for a company to distribute profits to its shareholders, it must first adhere to two specific conditions that are: –
i. The company must be SOLVENT (company’s asset percentage higher than liabilities) according to Section 131;
ii. The company must have funds represented by PROFITS available for distribution.
Obligation of the Director
Following, the Director would have numerous essential obligations to adhere to prior to distributing dividends which are: –
i. The distribution must be AUTHORIZED BY THE DIRECTOR; and
ii. Ensure the company must have adequate funds to repay back its debts within 12 months from the date of dividend distribution
iii. Preparation of both solvency test and all necessary steps is a must to prevent distribution of dividends should Directors cease to be satisfied on reasonable grounds the company still meets the solvency test.
What is Solvency Test?
For those unfamiliar, a solvency test is a type of financial forecast that provides companies insight into their financial health status. The purpose of the forecast conducted is to ensure that companies are capable in paying off their debts as and when it is due and within the time span of 12 months after distribution of dividends.
The ideal time for conducting the test should be prior to the authorization of dividend proposal and the re-visitation of it before commencing with the actual distribution.
Like any regulation however, there’s a penalty for any action that goes against its stated precepts. Such is the case that should any Director or Officer fail to comply with the above regulations below could either: –
i. Be imprisoned for 5 years
ii. Fined a heavy sum of RM3million
iii. Or worse, BOTH!
Hence, to avoid such unnecessary headaches and financial drains, it’s best that company owners enable their companies to undergo a solvency test to ensure compliance.
In lieu of the company being unable to repay back its creditors within the span of 12 months after dividends have been distributed, the Act requires that those dividends are returned to the company.
According to Section 133, it states that the company may recover the amount of distribution received by a Shareholder which exceeds the amount which could properly have been made unless the Shareholder her/himself:
i. Received the distribution in good faith
ii. Has no knowledge the company didn’t satisfy the solvency test
From the current updates pertaining to dividends in Companies Act 2016, lawmakers are now placing a much higher emphasis on Directors to act more responsibly in their conduct.
This puts a lot of tension on Directors as they are required to conduct their company more stringently and in fairness with their dealings on the aspect of dividend distribution to be consistently in compliance with Companies Act 2016.
Which is why we at Incorp would like to express that we understand that having to juggle between the wellness of your shareholders and the needs of the company can be quite the mental and resource drain and thus, would like to extend our helping hand through our team of professionals of more than 38 years in the field of company secretarial matters in helping you engage such a feat in a manageable proportion.
To find out more, please feel free to liaise with us either via our email or WhatsApp with the following details located below and we’ll revert as soon as possible: –