ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law
Orchid Co paid a dividend to shareholders when it had insufficient distributable profits. Shareholder Priya received $5,000 and honestly believed the dividend was properly paid, having no reason to suspect otherwise. What is the position regarding repayment by Priya?
Priya need only repay if she knew or had reasonable grounds to believe the distribution was unlawful. Since she honestly believed it was proper and had no reason to suspect otherwise, she is not liable to repay the $5,000 under the usual rule.
- APriya must repay only if she knew or had reasonable grounds to know the distribution was unlawfulCorrect
- BPriya must always repay because the distribution was unlawful
- CPriya need not repay because dividends once declared become debts
- DPriya must repay only if the company is insolvent
Explanation
An unlawful distribution can be recovered from a shareholder only if they knew, or had reasonable grounds to believe, that it contravened the rules. An innocent recipient is not required to repay. The claim that payment is always repayable ignores the knowledge test, and insolvency is not the condition.
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