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ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law

Zentra Ltd, a company with distributable profits of $50,000, pays a dividend of $80,000 to its members. Which statement best describes the position of the dividend?

The dividend is unlawful because a company can pay dividends only out of distributable profits. Paying $80,000 when only $50,000 is available breaches capital maintenance rules, and neither the members' good faith nor board approval can make an excessive payment lawful.

  1. AIt is lawful because the members received it in good faith
  2. BIt is unlawful because it exceeds the profits available for distributionCorrect
  3. CIt is lawful provided the directors approved it by a board resolution

Explanation

A company may only pay dividends out of distributable profits (accumulated realised profits less accumulated realised losses). A payment of $80,000 against $50,000 of distributable profits exceeds that limit, so it is unlawful. Good faith of members or director approval does not make it lawful.

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