24 August 2016

Key Changes to the Dividend Regime

Changes to the dividend regime are among the major reforms proposed under the Companies Bill 2015 (the “Bill”). In addition to the existing requirement that dividends be payable out of profits, the Bill requires directors to ensure that the company will be solvent immediately after payment of the dividends and imposes criminal penalties for default.

Key changes to the dividend regime

1. Distribution of dividends

Under the current Companies Act 1965, dividends can only be paid to shareholders:

  • out of profits; or
  • pursuant to the application of a company’s share premium account towards payment of dividends if such dividends are satisfied by the issue of shares (i.e. share dividends).

Under the Bill, the restriction on dividends out of profits remains, but there is now an additional obligation on directors to ensure that the company is solvent both at the time of declaration as well as distribution of dividends.

The ability to pay dividends out of the share premium account remains only in the transition period of 2 years from the date the Bill comes into effect, and after that, due to the abolition of the share premium account, this will no longer be available. For further information on the   abolition of par value and related concepts of share premium and capital redemption reserve, see our our earlier Client Alert on “Migration to no-par value regime” available here.

2. Obligations of directors

There are two critical points at which solvency must be considered.

  • Before authorising the distribution of dividends, directors must consider whether the company is able to pay its debts as and when they become due within 12 months immediately after the distribution is made (“solvency test”).
  • Prior to actually making the payment of the dividends, the directors must revisit the solvency test and take all necessary steps to prevent a distribution of dividends if, the directors cease to be satisfied on reasonable grounds that the company still meets the solvency test.

Any director or officer who willfully pays or authorises the payment of any improper or unlawful distribution shall be liable on conviction to a 5-year imprisonment or RM3 million fine, or both.

It can be seen that the solvency test for dividends will impose more onerous demands on directors.  Not only do the directors need to assess the company’s cash flow and financial position at the point of distribution, they will also need to forecast these for a period of 12 months after the intended distribution date.  In practice the directors are likely to require advice on the solvency of the company. The Bill does not elaborate on this solvency test and the extent of enquiries that directors will need to make into the state of affairs, prospects or financial position of the company.

3. Clawback

Any dividend paid to a shareholder which exceeds the value of any distribution that could properly have been made can be clawed back by the Company, unless the shareholder:

  • has received the distribution in good faith; and
  • has no knowledge that the company did not satisfy the solvency test.

The company can also recover the difference from a director or manager who willfully pays any dividend in contravention of the relevant provisions relating to distribution and solvency; which he knows are not profits.

If you have any questions or require any additional information, you may contact  Idahani Ismas, Shermaine Ng or the ZICO Law partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.