This is a question that was posed to us by a potential client. This individual is a shareholder of a Singapore registered company. We are assuming that he has never received any dividends from the company.

With reference to section 403 of the Companies Act, dividends can only be paid out from the company’s net profit. If dividends are paid out when there are no profits, the company directors who made the dividend payment will be personally liable.

Here is a reproduction of section 403 of the Companies Act:

Dividends payable from profits only
403.—(1)  No dividend is payable to the share‑holders of any company except out of profits.

(1A)  Subject to subsection (1B), any profits of a company applied towards the purchase or acquisition of its own shares in accordance with sections 76B to 76G are not payable as dividends to the shareholders of the company.
(1B)  Subsection (1A) does not apply to any part of the proceeds received by the company as consideration for the sale or disposal of treasury shares which the company has applied towards the profits of the company.
(1C)  Any gains derived by the company from the sale or disposal of treasury shares are not payable as dividends to the shareholders of the company.
(2)  Every director or chief executive officer of a company who wilfully pays or permits to be paid any dividend in contravention of this section —

(a) shall, without prejudice to any other liability, be guilty of an offence and shall be liable on conviction to a fine not exceeding $5,000 or to imprisonment for a term not exceeding 12 months; and
(b) shall also be liable to the creditors of the company for the amount of the debts due by the company to them respectively to the extent by which the dividends so paid have exceeded the profits and such amount may be recovered by the creditors or the liquidator suing on behalf of the creditors.
(3)  If the whole amount is recovered from one director or chief executive officer, he or she may recover contribution against any other person liable who has directed or consented to such payment.
(4)  No liability by this section imposed on any person extends or passes, on the death of such person to the person’s executors or administrators nor is the estate of any such person after the person’s death liable under this section.
(5)  In this section, “dividend” includes bonus and payment by way of bonus.

 

There are two types of dividends:

  1. Final dividend; and
  2. Interim dividend

 

Final dividend

This is declared by the directors during the Annual General Meeting (AGM). It needs to be approved by the shareholders. The dividends are based on the actual profit based on the approved financial statement. At the AGM, the shareholders will approve the financial statements. Therefore, the approved profits that are stated in the financial statements will be both certified true and accurate by the directors and approved by the shareholders. This final dividend will then form a debt and cannot be cancelled or reduced.

 

Interim dividend

This is declared by the directors at any time other than the AGM. It is not final and does not immediately form a debt. The company can cancel or reduce the declared interim dividend.

 

Therefore, if the directors declare an interim dividend, the company can choose to amend or cancel this interim dividend.

 

A company doesn’t need to declare dividends if it makes a profit. The company can reinvest the profits in the business. This is a board decision. However, there may be a situation where the shareholders are unhappy that dividends are not being declared. These shareholders may subsequently not want to invest further in the company or may choose to sell their shares as they are not getting returns on their investment.

 

Yours sincerely,

The editorial team at Raffles Corporate Services