How Do Companies Pay Dividends To Shareholders In Malaysia?

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How Do Companies Pay Dividends To Shareholders In Malaysia?

November 17, 2021 incorp 0 Comments

Reading Time: 3 Minutes 30 Seconds –

When it comes to “dividends”, the term usually relates to those dealing in both stocks and stock trading. But as company/business owners of a private company, do we know how to distribute profits to shareholders while staying compliant with the principles of Companies Act 2016 (CA2016)? 

 

This article is written with the purpose of providing practical insight into such conduct. With that, let’s begin…

 

About Dividends

Dividends are defined as a return of income to a shareholder in respect of her/his share portion. As explained earlier, shareholders are rewarded a certain percentage of the profits accumulated by the company that they financially invested in as a means of return on investments. This is especially so during seasons of financial success for the corporate entity. 

 

Distribution of Dividends

However, the act of dividend distribution is not as simple. In fact, according to CA 2016, should a company intends to distribute profits to its shareholders, it must first adhere to three specific conditions: –

i. The company must be SOLVENT (company’s asset percentage higher than its liabilities) according to Section 131 of Companies Act 2016;ii. Dividend distribution must be done through PROFITS generated by the company;

iii. Ensure there’s sustainable CASH in-hand and cashflow in the company’s bank account.

dividend-case-study-table-design

Based on the table above, we can see the probability of being able to distribute dividends heavily relies on the 3 main criteria covered from earlier – Solvency (Solvent) of the Company, Available Profits of the Company, Cash Availability. Hence, listed below is the detailed overview of all 3 case studies: –

 

 

Case Study 1 displays the Sendirian Berhad (Sdn. Bhd.) company being eligible to distribute dividends due to the total accumulated profit of RM400 from the previous years of 2020 (RM300) and 2021 (RM100) (Accumulated Profits) and possessing available cash reserves in the bank account amounting to RM200 (Solvent). In addition, forecasting shows that it has adequate funds to carry on business operation for the next 12 months, leaving a net cash-flow of RM50 (Cash Availability) for dividend distribution.

 

Case Study 2 shows that the Sendirian Berhad (Sdn. Bhd.) company had made a RM100 loss over the previous year in 2021. However, a RM300 profit was able to be brought forth from year 2020 (Accumulated Profits). Hence, this enables the Sendirian Berhad (Sdn. Bhd.) company to retain a RM200 profit (Solvent). Supporting this, the company also possesses an amount of RM200 in their company’s bank account. Forecasting notes that it possesses adequate funds for company operations the following year ahead. This leaves a net cashflow of RM50 for dividend distribution (Cash Availability). Hence, the Sendirian Berhad (Sdn. Bhd.) company is therefore eligible to distribute dividends.

 

Case Study 3 indicates that the Sendirian Berhad (Sdn. Bhd.) company had faced severe losses for both years of 2020 and 2021, resulting in a total accumulated financial loss. Nonetheless, the Sendirian Berhad (Sdn. Bhd.) company still had cash reserves amounting to RM200 in its bank account (Cash Availability). Forecasting notes that RM150 is only needed to carry on company operations the next 12 months. This leaves RM50 worth in net cashflow for distribution. However, the company is NOT eligible to distribute dividends as a result of not qualifying 2/3 of the requirements – Solvency and Available Profits.

Obligation of the Director

Following, the Director of a company has statutory obligations to adhere to prior to distributing dividends. These include: –

i. The distribution must be authorized by the Director;

ii. Ensure the company has adequate funds to repay back its debts within 12 months immediately after the date of dividend distribution;iii. Preparation of solvency test and carry out all necessary steps to prevent distribution of dividends, should Directors cease to be satisfied on reasonable grounds that the company will be solvent after distribution has been made.

What is Solvency Test?

For those unfamiliar, a solvency test is a type of financial forecast statement that provide companies insight into their respective financial health status. The purpose of the solvency test is to ensure companies are capable of 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.

 

Non-Compliance

Penalties incurred, should the Director or Officer fail to comply with the above regulations, could cause them to either: –

i.  be imprisoned for a term not exceeding 5 years

ii. be fined a hefty sum of not more than RM3million

iii. or worse, BOTH!

 

Hence, to avoid such unnecessary headaches and financial drains, it’s best that company owners enable their companies undergo a solvency test to ensure compliance with CA2016.

 

Clawback

In lieu of the company being unable to repay its creditors within the span of 12 months after dividends have been distributed, the Act requires that those dividends be returned to the company.

According to Section 133, the company may recover the amount of distribution received by a Shareholder, exceeding the amount that could probably 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 current updates pertaining to dividends in CA2016, lawmakers are now placing a much higher emphasis on Directors to act more responsibly in their conduct.

 

This puts immense pressure on Directors as they are required to stringently conduct their company when dealing on the matter of dividend distribution in accordance with CA2016.

That’s why Incorp, your trusted business partner understands the predicament of having to juggle between the interests of your Shareholders and the needs of the company, which can be quite the mental and financial drain in the long run. 

So why not let us to extend a helping hand through our team of professionals, who are equipped with more than 38 years of experience in the field of company secretary matters here in Malaysia.

Interested? Feel free to connect with us either via our email or WhatsApp now. If you have any further queries, our representatives will be more than happy to swiftly assist you as well.

Email: secretarial@elegant.com.my

WhatsApp: +6017-2727118

 

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