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

Zentra Ltd paid a dividend to its members at a time when it had no distributable profits. Under the general principle of capital maintenance applied in most common law company systems, what is the legal position of the dividend?

The dividend is unlawful because companies may pay dividends only out of distributable profits. Paying one with no such profits returns capital to shareholders and breaches capital maintenance. Member approval or directors' hopes of future profit do not make it lawful.

  1. AIt is lawful if approved by an ordinary resolution of the members
  2. BIt is lawful if the directors believed the company would trade profitably next year
  3. CIt is an unlawful distribution because dividends may be paid only out of distributable profitsCorrect
  4. DIt is lawful provided the company's share capital remains above the minimum capital

Explanation

Dividends must be paid only from profits available for distribution. Where none exist, a payment returns capital to members, which breaches capital maintenance. Member approval or optimism about future trading cannot cure the breach.

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