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

Sunrise Textiles Ltd., a public company, declared an interim dividend in January out of its profits for the current year. The Board wants to know the legal status of the amount once it is declared. Which statement reflects the correct legal position under the Companies Act, 2013?

An interim dividend, once declared by the Board, becomes a debt due from the company to its members, and the amount must be deposited in a separate scheduled bank account within five days of declaration. It cannot be revoked and needs no members' approval.

  1. AThe interim dividend may be revoked by the Board at any time before payment
  2. BThe interim dividend can be paid only after approval by members at the next general meeting
  3. CThe amount of interim dividend, once declared, becomes a debt payable by the company and must be deposited in a separate bank account within five daysCorrect
  4. DThe interim dividend can be paid only out of free reserves and never out of current year profits

Explanation

Interim dividend may be declared by the Board during the financial year out of surplus in the profit and loss account or out of current year profits. Once declared, it becomes a debt of the company towards members and the amount must be deposited in a separate bank account within five days of declaration. Option A is wrong as it cannot be revoked once declared, and no general meeting approval is needed.

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