Everything you need to know about DIVIDEND

  Understanding Dividends in Malaysia: A Guide for Shareholders and Directors

In the corporate landscape of Malaysia, dividends represent one of the primary ways shareholders receive returns on their investments. However, the declaration and distribution of dividends involve complex legal considerations that both directors and shareholders must understand to ensure compliance with the Companies Act 2016 (CA 2016).

 What Are Dividends?

 Dividends are distributions of a company's profits to its shareholders, typically paid in cash but sometimes issued as additional shares. They represent a tangible return on investment for shareholders and signal a company's financial health and management philosophy.

 Legal Framework Governing Dividends in Malaysia

 The distribution of dividends in Malaysia is primarily governed by the CA 2016, which introduced significant changes from the previous Companies Act 1965. Understanding these provisions is crucial for corporate governance.

  Solvency Test Requirement

 Under Section 131 of the CA 2016, a company may only distribute profits as dividends if the company is solvent. This represents a key safeguard to protect creditors and the company itself.



The solvency test outlined in Section 132(3) requires that:

 1. The company must be able to pay its debts as they become due in the normal course of business (cash flow test)

2. The value of the company's assets must exceed its liabilities (balance sheet test)

Before any dividend distribution, directors must make a solvency declaration confirming that these conditions are met.

 

 Authority to Declare Dividends

 

Section 132(1) of the CA 2016 vests the authority to authorize distributions in the directors:

 "Before a distribution is made by a company to any shareholder, such distribution shall be authorised by the directors of the company."

 This represents a departure from the common law position where shareholders in general meetings had the ultimate authority on dividend payments.

  Available Profits for Distribution

 A fundamental principle of dividend distribution is that it must come from genuine profits. The CA 2016 doesn't explicitly define "profits," but case law provides guidance.

 In [Marra Development Ltd v BW Rofe Pty Ltd](https://theedgemalaysia.com/categories/corporate) (1977), the court established that a company must have profit at the time of declaration. However, Section 131(1) of CA 2016 now suggests that profits must be available at the time of distribution, potentially altering this principle.

 Several key rules apply to determining distributable profits:

 1. Company accounts must be prepared according to applicable accounting standards (Section 244)

2. Only the company's own profits are relevant, not those of its subsidiaries unless paid as dividends to the holding company (Industrial Equity Ltd v Blackburn, 1977)

3. Capital profits may be distributed unless the company's constitution provides otherwise

  Directors' Responsibilities
 

Directors bear significant responsibilities when it comes to dividend declarations:

  1. Solvency Assessment

 Directors must conduct a proper solvency assessment before authorizing any dividend. This involves evaluating both current and projected financial positions.

  2. Duty of Care and Skill

 Directors must exercise reasonable care, skill, and diligence in assessing whether a dividend is appropriate, considering factors such as:

- Current and projected cash flow

- Future capital needs

- Contractual obligations

- Industry conditions

- Shareholder expectations

  3. Documentation

 Proper documentation of the decision-making process is essential, including:

- Financial analyses supporting the dividend decision

- Minutes of board meetings discussing the dividend

- Formal solvency declarations

  Liability for Improper Dividend Distributions

 The CA 2016 imposes potential liabilities on both directors and shareholders for improper dividend distributions:

  Directors' Liability

 Section 133(2) states:

 "Every director or manager of the company who wilfully pays or permits to be paid any dividend in contravention of section 131 or 132, which he knows from his knowledge is not profits shall also be liable to the company to the extent of the amount exceeded the value of any distribution of dividends that could properly have been made."

 This liability exists when:

- The distribution contravenes Sections 131 or 132

- The director knew the payment was not from profits

- The director willfully authorized the payment

 In RST Bhd (a case example), directors approved dividends of RM500,000 when profits were only RM100,000. They became liable to the company for the RM400,000 excess.

  Shareholders' Liability

 Section 133(1) provides that the company may recover excess distributions from shareholders unless the shareholder:

- Received the distribution in good faith

- Had no knowledge that the company failed the solvency test

 The concept of constructive trust may also apply. In Precision Dripping Ltd v Precision Dripping Marketing Ltd (1985), the court held that members receiving dividends they knew were not from profits were liable to repay them.

  Practical Guidance for Directors

  Do:

1. Ensure comprehensive financial analysis before dividend recommendations

2. Document the solvency assessment process

3. Maintain detailed board minutes regarding dividend decisions

4. Consult financial and legal advisors when in doubt

5. Consider long-term business needs alongside shareholder expectations

  Don't:

1. Declare dividends that would render the company insolvent

2. Approve distributions without proper financial analysis

3. Use dividends as a mechanism to extract value at creditors' expense

4. Ignore warning signs about the company's financial health

5. Succumb to shareholder pressure for dividends when financially imprudent

 Shareholder Rights Regarding Dividends

Shareholders have several rights and remedies concerning dividends:

 Right to Receive Declared Dividends

 Once declared, dividends become a debt due to shareholders (BSN Commercial Bank (M) Bhd v River View Properties Sdn Bhd, 1996).

 Remedies for Unfair Dividend Policies

Section 346 of the CA 2016 provides remedies for oppression, including scenarios where directors withhold reasonable dividends. In Re Gee Hoe Chan Trading Co Pte Ltd (1991), the court granted relief where directors paid themselves substantial fees while withholding dividends from minority shareholders.

 Preference Shareholders' Rights

The rights of preference shareholders must be expressly stated in the company's constitution under Section 90(4), including:

- Dividend rates and priority

- Whether dividends are cumulative or non-cumulative

- Voting rights

- Capital repayment priority

 

 Corporate Governance Best Practices

Beyond legal compliance, good corporate governance regarding dividends includes:

 1. Transparent Dividend Policy: Companies should establish and communicate clear dividend policies to shareholders

2. Regular Review: Dividend policies should be regularly reviewed in light of changing business conditions

3. Balanced Approach: Distributions should balance shareholder returns with business sustainability

4. Consistent Implementation: Policies should be consistently implemented to build shareholder trust

 Conclusion

Dividends represent a crucial aspect of the shareholder-company relationship in Malaysia. The CA 2016 establishes a framework that balances shareholder interests with corporate sustainability and creditor protection.

Directors must navigate these provisions carefully, ensuring dividends are declared only when financially prudent and legally compliant. Shareholders, meanwhile, should understand their rights regarding distributions while recognizing that dividends remain discretionary and subject to the company's financial capacity.

By understanding these principles, both directors and shareholders can contribute to a healthy corporate ecosystem that rewards investment while ensuring sustainable business operations.


This article provides general information and should not be construed as legal advice. 

For specific situations, please consult with a qualified legal professional. 

 


Comments

Post a Comment

Popular posts from this blog

Tax Audit - Amount Due To Director vs. Due From Director

In corporate accounting in Malaysia, it’s essential to distinguish between “Amount Due to Director” and “Amount Due from Director” because each carries different accounting and tax implications. When you record an “Amount Due to Director,” you are acknowledging a liability ( credit side of Trial Balance, same as Revenue, also on credit side )  on your company’s balance sheet. This relates to genuine obligations the company has toward a director, such as unpaid salaries, bonuses, or advances that have not yet been repaid. In this case, the company owes money to the director, and the transaction must be properly documented to show that the payment is a regular, legitimate expense. If not clearly identified, such liabilities might be scrutinised by LHDN (Malaysia Inland Revenue Board) to ensure they are not misclassified in an attempt to reduce taxable income or mask non-deductible expenses. In contrast, an “Amount Due from Director” represents a receivable, meaning that the director...
Read more

Close down LLP -- Winding Up Process and Procedure

Image
To wind up a Limited Liability Partnership (LLP) in Malaysia, the process involves several steps governed by the Limited Liability Partnerships Act 2012 and requires coordination with various authorities, notably the Inland Revenue Board (LHDN) and the Companies Commission of Malaysia (SSM).  Here’s a detailed overview of the winding-up process: : : The LLP must be dormant, meaning it should not be carrying on any business or operations. All bank accounts must be closed, and there should be no assets or liabilities remaining. : Ensure that all debts, liabilities, and penalties under the LLP Act have been settled. This includes any outstanding tax obligations with LHDN. : All relevant employee registrations (EPF, SOCSO, EIS) must be closed before proceeding with the application for winding up. : Submit the final tax return (Form PT and Form E) to LHDN and obtain a written notice (CP7(PT) Form) confirming that there are no objections to the dissolution of the LLP....
Read more

Company Constitution - Why, when and how.

Image
  Understanding the Role of a Constitution in Malaysian Companies:  When and Why a Company Secretary Recommends Adoption The Constitution of a company serves as its foundational governance document, outlining the rules and procedures for internal management. In Malaysia, under the Companies Act 2016 (CA 2016) , companies are no longer mandated to adopt a constitution, marking a shift from the previous regime that required a Memorandum and Articles of Association (M&A). However, a constitution remains a critical tool for structuring a company’s operations, particularly in complex or shareholder-sensitive scenarios. As a Company Secretary (CoSec) , advising on its adoption requires balancing regulatory compliance, practical governance needs, and stakeholder interests. This article explores the circumstances under which a constitution is recommended, its benefits, and how its adoption aligns with corporate best practices in Malaysia. Extract of CA2016 1. What is a Consti...
Read more