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

Himalaya Textiles Ltd has a financial year ending 31 March. Its board declared an interim dividend in February out of the profits earned during the current year up to 31 December. Which statement correctly states the legal position on the interim dividend once declared?

An interim dividend, once declared by the board, is a binding declared dividend that the company must pay within the prescribed time. It does not need shareholder approval at the AGM and cannot be withdrawn like a recommendation, because declaration creates a debt owed to the members.

  1. AIt can be withdrawn by the board at any time before the AGM since it is only a recommendation
  2. BIt is a declared dividend that is payable, and the amount so declared is treated as a debt of the company towards members, subject to the payment provisionsCorrect
  3. CIt becomes payable only after the shareholders approve it at the next general meeting
  4. DIt can be paid only out of free reserves and not out of current year profits

Explanation

The board may declare an interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year up to the quarter preceding the declaration. Once declared, it is not a mere recommendation and the company must pay it within the stipulated time. Option C describes a final dividend, which needs shareholder approval at the AGM.

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