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

Zenith Motors Ltd has accumulated profits but incurred a loss in the current year. The board proposes to declare dividend out of free reserves. Under the Companies (Declaration and Payment of Dividend) Rules, 2014, which condition applies to this dividend?

When a company pays dividend out of free reserves in a year of inadequate or no profit, the rate cannot exceed the average of the preceding three years' rates, and reserves remaining after the drawal must be at least 25 percent of paid-up capital. No government permission is required.

  1. AThe rate of dividend must be at least 20% of paid-up capital
  2. BThe rate of dividend declared cannot exceed the average of the rates declared in the three immediately preceding years, and the balance of reserves after drawal must not fall below 25% of paid-up capitalCorrect
  3. CThe rate of dividend must exceed the average of the last three years' rates, and reserves must stay above 50% of paid-up capital
  4. DDividend can be declared out of free reserves only with prior permission of the Central Government

Explanation

For dividend out of reserves in a year of inadequate or no profit, the rate cannot exceed the average of the rates in the three preceding years, the amount drawn cannot exceed one-tenth of the sum of paid-up capital and free reserves, and the residual reserves must be at least 25% of paid-up capital. Option C reverses the limits and option D invents a government approval requirement.

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