Requirements for declaring a dividend

A recent development has been the implementation of The Companies Act 71 of 2008. This act is an improvement on the previous legislation and imposes more rigorous measures on directors when it comes to declaring dividends. Due to the consequences of contravening this act, we would like to make you aware of your extended responsibilities so that you can protect not only your business, but yourself.

Compared to the 1973 Act, the 2008 Act has much more stringent requirements for declaring a dividend to shareholders.  The new Act imposes a greater burden on directors to ensure that the dividends are declared in the correct manner and procedure.  The consequences of not doing so could result in the possibility of a director being held personally liable for the amount the company paid out in terms of a dividend declared and paid in contravention of the Act.

The 2008 Act also extends the liability to include an alternate director, prescribed officer*, a person who is a member of a committee of the board or the audit committee (irrespective of whether or not the person is also a member of the company’s board).  These persons are subject to the same duties of care, skill and diligence as a director on the board, particularly in relation to Section 46, which requires that the dividend must be:

  • Authorised by a board by resolution; and
  • Immediately after giving effect to the resolution, it reasonably appears that the company will satisfy the solvency and liquidity test; and
  • The board resolution acknowledges that the board applied the solvency and liquidity test; and
  • The board reasonably concluded that the company will satisfy that test immediately after completing the proposed distribution.

So what is the solvency and liquidity test?

The assets (as fairly valued) of the company must be equal to or exceed its liabilities (including reasonably foreseeable contingent liabilities) and it must appear that the company will be able to pay its debts as they become due for the following twelve months after the date of the distribution.

The test will be an accounting exercise, as the Act states how the various values are to be calculated and what assets and liabilities are to be taken into account.

Liability for contravention of Section 46

A director will be liable for loss, damages or costs sustained by the company as a direct or indirect consequence of being present at a meeting, or for knowingly consenting to or failing to vote against, the resolution approving a distribution, despite knowing that the distribution was contrary to Section 46. Liability is joint and several with any other person who may be liable for the same act.  Just by being present at a meeting means that you are required to either vote for or against the dividend.  You cannot abstain from voting.  If you abstain you may still be liable.

Dividends declared but not yet paid before 1 May 2011   

Should a company have declared dividends but not yet paid them out before 1 May 2011 (when the new Act came into force), then the company will need to re-authorise them in terms of the 2008 Act’s requirements.

New dividend tax – implemented 1 April 2012

The new dividend tax was implemented on 1 April 2012.  Dividends tax will be levied at a rate of 15% on the amount of any dividend paid by a company.  The recipient of the dividend (the shareholder) will be liable for the dividend tax, but subject to certain exemptions, the company declaring and paying the dividend is obliged to withhold the tax from the amount of the dividend paid and pay the tax to SARS, by the last day of the month succeeding the date of payment.  There are certain persons which are exempt from the dividends tax, the most noteworthy being a South African resident company.

*A prescribed officer is a person, who, despite not being a director on the board, and irrespective of any title given to him or her:

  • exercises general effective control; or
  • regularly participates to a material degree

over the management of the whole or significant portion of the business and activities of the company.

Given the importance of adhering to the correct corporate governance practices, we would like to assist you in making sure that your company is functioning optimally and within the law. Arnold Scholtz or Pieter Aucamp will assist you further should you have any more questions. They can be contacted on 021 840 1600 or respectively at arnold@asl.co.za and pieter@asl.co.za


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