An Overview of Dividends under the Companies Act 2016

Investors are the shareholder and owners of a company. Generally, shareholders have rewarded a share of the profits they invested as a means of return on investments; a so-called dividend.

But as company owners, how much do you know as to when the company can distribute profits and comply with Companies Act (CA), 2016?

Let’s begin to understand more about the compliance for the dividend.

To distribute dividends, it has 2 principles that the company must comply accordance with Section 131(1) of Companies Act, 2016 as below:

1. distribute out of the company’s profit; and

2. the company is solvent

Who is obliged to distribute the profit to the shareholder?

Generally, the distribution of profits shall be authorised by the company directors before any payment is made to the shareholder.

What are the criteria to consider for distribution?

Of course, it is the company’s solvency status.

Directors need to satisfy that the company will be solvent immediately after the distribution of profit is made.

Hence, preparation and analysis of a solvency test are mandatory steps to satisfy the dividend distribution with reasonable grounds to be carried out or to cease. Directors should not distribute any dividend once the solvency test does not satisfy.

What is Solvency Test?

In layman's terms, a solvency test is a kind of financial forecast that provides insight into the company's financial position to make sure the capability of the company is solvent.

What is the meaning of being solvent?

Being solvent is a condition where the company can pay its debts as and when the debts become due within 12 months from distribution.

When to perform the solvency test?

Best to perform before the authorisation of the dividend proposal and to re-fresh it before distribution.

What is the penalty for non-compliance?

Any contravene of this section, the company, every officer and any other individuals shall be liable to the following upon conviction :

• imprisonment for a term not exceeding 5 years; or

• fine not exceeding RM3 million; or

• both

Can the company recover the exceed amount of dividend paid to the shareholder?

According to Section 133 of CA 2016, the company may recover from the shareholder any amount exceeding the value of the distribution.

Exception rule: The shareholder has

• received the distribution in good faith; and

• no knowledge that the company did not satisfy the solvency test.

Hence, Directors need to watch out and be more responsible as lawmakers are now placing much higher strain on them to run the company more stringently and fairly with their dealings on the aspect of dividend distribution to be consistently in compliance with Companies Act 2016.

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