A company must have made sufficient profits before it can pay dividends to its shareholders. Discuss...

A company must have made sufficient profits before it can pay dividends to its shareholders. Discuss the statement

Expert Solution

As per the Corporation Act 2010 as long as the below point (a), (b) & (c) are satisfied the Dividend can be paid out of Capital and also retained earnings or other reserves.

A company is no longer required to have profits in order to pay dividends , however the below requirements are to be met unless which a company cannot pay dividend.

(a) The company's Assets exceed its Liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend ; and

(b) The payment of dividend is fair and reasonable to the company's shareholders as a whole ; and

(c) The payment of dividend doesn't materially prejudice the company's ability to pay its creditors.

The payment of dividend is considered to be materially prejudice the company's ability to pay its creditors if the company becomes insolvent as a result of the payment.

Note: Assets and Liabilities in point (a) are to be calculated in accordance with accounting standards in force at the relevant time. The Act now applies Solvency test for the payment of dividends as opposed to a "Profits" test in the past, which specified that dividend could only be part of profits.

ekkarill92 answered 2 years ago

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