Declaring Dividends — a new test: Changes to section 254T of the Corporations Act 2001

The law about when a company can pay a dividend has recently been changed. A new test has now replaced the requirement that companies must pay dividends only out of profits. Cleardocs has recently updated the company constitution it provides to reflect the law's new flexibility.

You can use Cleardocs to arrange an up to date constitution for a “Pty Ltd” company.

Robert Green

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Old law

The old section 254T required that a dividend be paid only out of the company's profits.

The Cleardocs company constitution used to reflect this, as follows:

• Declaration of dividends

  Subject to the Corporations Act and any special rights or restrictions applicable to any shares, the directors may declare and pay dividends on shares that appear to them to be justified in light of the profits made by the company.

  ...

However, on 5 August 2010, Cleardocs updated its company constitution by deleting this part of the clause and replacing it with the new test set in the new section 254T.

New law

The new section 254T sets out three requirements that must all be met before a dividend can be declared and paid. Under the new law, directors can declare and pay a dividend — regardless of profitability — if:

• the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient to pay the dividend;
• the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
• the payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Obviously, a company's profitability is likely to impact on the directors' decisions about paying dividends — but it's no longer the sole determinant.

The new section 254T also prescribes how assets and liabilities are to be calculated for the purpose of declaring a dividend. The new section states that assets and liabilities are to be calculated in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).

The new requirement for companies to calculate assets and liabilities in accordance with 'accounting standards' may increase the reporting requirements of small companies.

Cleardocs customers should consult their accountants to ensure that they comply with this obligation.

Do I need to arrange a Constitution update for my — or my client's — Company?

You should:

• review your — or your client's — old Constitutions or Memorandum of Association and Articles of Association; and
• consider updating if your company or your clients wish to take advantage of the new rule.

You can update the documents using the Cleardocs Change to Constitution document package.

If your company's constitution (or Memorandum of Association and Articles of Association) contains the old rule, then you will still be able to pay dividends. However:

• you will need to satisfy the old rule as set out in the company's existing document (which is likely to state that the directors may declare and pay dividends on shares that appear to them justified in light of profits made by the company); and
• you will also have to satisfy the requirements of the new section 254T.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Corporate and Commercial Team.

More Cleardocs information on companies

You can read an overview of some things to consider when registering an Australian company here.

Order company related document packages

Update a company's constitution or Memorandum of Association and Articles of Association

Set up a new company

Change from more than one director to only one director

Reserve a company name

Order a Division 7A Loan Agreement

Order a company register for an already registered company