07-24-2009, 10:01 AM
Bilal,
It's really a nice question. Thanks God we are seeing some professional queries, otherwise the forum was becoming a place of only the academic questions.
First of all I remind you that term PROFIT(s) has no where been defined in CO84. For guidance purpose judiciary, regulators as well as advisors always refer to the definition given in repealed Companies Act 1913. Probably in its section 87C.
Having said that I come to your queries.
Reply to query 1
The company can pay dividend to the extent of all the accumulated profits keeping the capital unaffected. The current year's loss does not make it illegal. However, in certain cases entities have to keep in view the minimum capital requirements stipulated by specific legislature where the term minimum capital means equity instead of paid up capital. Examples are banks, NBFCs, Modarabas, Insurance companies, stock exchange brokers etc. They cannot pay dividend even out of profits if it results in non compliance of minimum capital (capital adequacy) requirement.
Reply to query 2
In my confirmed view company can pay dividend out of current year's profit regardless of accumulated losses which might have eroded the paid up capital.
The reason is, the capital has not been eroded by current year's results. Rather it was a past event which will be partially repaired even if the company pays the dividend somewhat lesser than the profit earned during the year.
I know some companies which had paid dividend in the situation described in your second query. I also know some companies which did so on the instructions of SECP in similar circumstances.
This matter has not been discussed in law specifically but there are legally enforceable precedents available for doing so.
The known logic is what I have explained.
Hope your question has been replied.
Regards,
KAMRAN.
It's really a nice question. Thanks God we are seeing some professional queries, otherwise the forum was becoming a place of only the academic questions.
First of all I remind you that term PROFIT(s) has no where been defined in CO84. For guidance purpose judiciary, regulators as well as advisors always refer to the definition given in repealed Companies Act 1913. Probably in its section 87C.
Having said that I come to your queries.
Reply to query 1
The company can pay dividend to the extent of all the accumulated profits keeping the capital unaffected. The current year's loss does not make it illegal. However, in certain cases entities have to keep in view the minimum capital requirements stipulated by specific legislature where the term minimum capital means equity instead of paid up capital. Examples are banks, NBFCs, Modarabas, Insurance companies, stock exchange brokers etc. They cannot pay dividend even out of profits if it results in non compliance of minimum capital (capital adequacy) requirement.
Reply to query 2
In my confirmed view company can pay dividend out of current year's profit regardless of accumulated losses which might have eroded the paid up capital.
The reason is, the capital has not been eroded by current year's results. Rather it was a past event which will be partially repaired even if the company pays the dividend somewhat lesser than the profit earned during the year.
I know some companies which had paid dividend in the situation described in your second query. I also know some companies which did so on the instructions of SECP in similar circumstances.
This matter has not been discussed in law specifically but there are legally enforceable precedents available for doing so.
The known logic is what I have explained.
Hope your question has been replied.
Regards,
KAMRAN.
