DESCRIPTION

Introduction

Dividend are the payment that has been declared by the directors of the company out of the company’s profit. It is mandatory that while declaring the dividend the company needs to divide the dividend equally among all its shareholders and each of them will be liable to get the dividend in proportion of the number of shares held by them. Before the dividend is declared, the directors of the company will pass the board resolution in the board meeting and all the directors must approve the resolution. While declaring the dividend the Articles of the corporation Act must authorized. The ordinary resolution must be passed in the meeting the only the dividend will be distributed.

Your friend has just purchased $5000 worth of shares in a public listed company. They are hoping to receive dividends. Explain to them the law relevant to the payment of dividends.

According to the question, if the person has acquired the shares of the public limited company them they will be liable for the dividend. According to the applicable law the shareholders are considered as the owners of the business corporations therefore they are liable to claim the specific amount of profit in the form of the dividend. Previously it was required that the company must pay profit out of the profit that it earns (Mithani, 2016). However, the act has been amended and now according to “Corporations Amendment (Corporate Reporting Reform) Act 2010” the company will pay the dividend only if satisfy the three tests that is:

Balance sheet test: In this test it is required that the assets of the company must exceeds the liability before the dividend is declared and the excess amount will be used for the payments of the dividend.

No material prejudice to the creditors: It is required for the company before the payment of the dividend to the shareholders that they must assess that the rights of the creditors cannot gets affected.  

Fair to shareholders: It is the duty and the responsibility of the company that they must assess that the rights and the power of the shareholders cannot gets affected. The payment of the dividend must be reasonable and fair. Therefore, the rights cannot be affected.

With the new changes, it has been seen that the companies are getting the greater flexibility for the dividend payment if the above-mentioned criteria are met.

According to the question if the person has purchased the share of the public limited company, them it will be the obligation of the company to pay the dividend to him. It is the discretionary power of the directors of the company to declare the dividend to the shareholder. It may not be necessary that it will always has to pay the dividend to the shareholders there may arise certain situation that the company suffers the loss. In that situation it may happen that the company is not, declaring the dividend for the particular year therefore in that case the shareholders will not be entitled to claim the dividend from the company. However, in case of profit it will be the sole decision of the directors of the company to declare the dividend and if once the dividend is declared by the company then it is mandatory to pay the dividend to the shareholders.  The dividend declared might be paid in terms of the cash or with the issue of the bonus shares. With the payment of the dividend the company will also be benefitted that the share price of the company will increase that will significantly increase the performance of the company and the prospective investors will also like to invest in the company. According to the implementation of the new rules, the listed companies are allowed to restructure the capital structure of the company reduction of the capital that will eventually affect in the expansion of the business with the profit that has been earned. If the company does not pay the dividend to the shareholders then they will be able to save the tax amount that needs to be paid in the form of the tax. The profit that the shareholders receive in the form of the dividend is assessable in the hands of the shareholders (Harris,et al ., 2013). 

The payment of the dividend must not be in contravention of the section 254T of the corporation law. It means that the company must be solvent and must have the positive assets. For the payment of the dividend, the “profit” should be recognized with the accordance of the Australian Accounting Standards.

In the provided question if the shareholder is, holding the preference share then the payment of the dividend will have been mandatory for the company as the preference shareholders gets the priority over the equity shareholders. The equity shareholders as regarded as the owners of the company therefore it is not obligatory for the company to pay the dividend to them, they will be entitled to get the amount invested when the company will be declared insolvent and when the company will pay off their liabilities they will  have the preferential rights over others. In this case it is not clearly mentioned that which type of share is being held by that person if she is entitled to hold the equity share then the payment of the dividend will not be mandatory and if she holds the preference share then the preference will be provided. Then she will be entitled to get the dividend no matter if the company earns the profit or not (Shamsabadi, et al., 2016).

Conclusion

Under the previous legislation section, 254T of the “CORPORATION ACT” before paying of the dividend the company needs to pass the “profits test” according to this criterion the company is allowed to pay the dividend only out of the profit of the company. However, the act has been amended and now the “three limb” test needs to be passed by the company. Dividend can now be paid other that out of profits that has made the payment of the dividend much easier for the company.  Earlier there was the stricter regime for the payment of the dividend and now the company needs to follow the three points while declaring the dividend. The dividend is the right of the shareholders that they will get in accordance to the rules of the company.