CA Intermediate · Corporate and Other Laws · Declaration and Payment of Dividend

Dhruv Engineering Ltd earned a profit in the current year but wishes to declare dividend out of reserves because the current year's profit is to be ploughed back. The company has never declared dividend out of free reserves before and has accumulated losses nil. Which statement states the correct legal position about declaring dividend out of free reserves in a year of inadequate or no profit under the Companies Act, 2013 and the related rules?

In a year of inadequate or no profit, dividend from free reserves is allowed only within rule limits: the rate cannot exceed the average rate of the three preceding years, and the balance reserves after drawal must be at least 15% of paid-up capital. It is neither unrestricted nor prohibited.

1. AThe rate of dividend cannot exceed the average of the rates declared in the three preceding years, and the amount drawn from reserves is limited so that the residual reserves after drawing are not less than 15% of paid-up capitalCorrect
2. BDividend can be declared out of reserves freely with no limit if the board approves
3. CDividend can never be declared out of reserves
4. DDividend out of reserves requires prior approval of the Central Government in all cases