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Scanned Judgements…!
Mandatory Declaration of Dividends - Main Points and Insights
Discretion of Directors: Directors generally have the discretion whether to declare dividends, even if the company is profitable. Several sources emphasize that dividend declaration is an internal management decision, not an automatic obligation ["Ng Kwong Weng @ David Ng lwn vs Ng Chee Yew Sdn Bhd dan lain-lain - High Court"], ["LEE TIN HUI vs GL PROPERTY MANAGEMENT SDN BHD & ORS - High Court"], ["VS INDUSTRY BERHAD vs LIM CHANG HUAT & ORS - High Court"].
Profitability and Solvency Requirements: Dividends can only be paid out of profits and when the company is solvent. The solvency test requires that immediately after the dividend, the company can pay its debts as they fall due, and the company must satisfy the solvency test to declare dividends ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"], ["ARAH CIPTA SDN BHD vs PIALA GAGASAN (M) SDN BHD & ANOR - 2010 MarsdenLR 1753"], [](https://supremetoday.ai/doc/judgement/MY_MLRH_2010_1_MLRH_823), ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"].
Legal Restrictions and Conditions: Under the Companies Act, dividends must be paid out of profits, and the company must pass the solvency test. Directors can be held liable if they pay dividends when the company is insolvent or out of capital, or if they fail to ensure the company is solvent ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"], ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"], ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"].
Non-declaration Despite Profitability: Several cases highlight that companies may choose not to declare dividends despite making profits, often due to internal policies or strategic reasons. However, failure to declare dividends does not violate the law if the company is not solvent or if directors exercise their discretion properly ["LEE TIN HUI vs GL PROPERTY MANAGEMENT SDN BHD & ORS - High Court"], ["VS INDUSTRY BERHAD vs LIM CHANG HUAT & ORS - High Court"], ["VS INDUSTRY BERHAD vs LIM CHANG HUAT & ORS - High Court"].
Implication of Profit and Solvency: Even if a company is profitable, dividends cannot be declared if the company does not meet the solvency test. The courts have held that paying dividends out of capital or when the company is not solvent is unlawful ["VS INDUSTRY BERHAD vs LIM CHANG HUAT & ORS - High Court"], ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"].
Analysis and Conclusion
Is declaration of dividends mandatory? No, directors are not legally obliged to declare dividends even if the company is profitable and passes the solvency test. The decision remains at their discretion, provided the company remains solvent and profits are available ["Ng Kwong Weng @ David Ng lwn vs Ng Chee Yew Sdn Bhd dan lain-lain - High Court"], ["LEE TIN HUI vs GL PROPERTY MANAGEMENT SDN BHD & ORS - High Court"].
Can directors choose not to declare dividends? Yes, directors can abstain from declaring dividends despite profitability, as long as they ensure the company is solvent and the declaration complies with legal requirements ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"], ["ARAH CIPTA SDN BHD vs PIALA GAGASAN (M) SDN BHD & ANOR - 2010 MarsdenLR 1753"].
Legal compliance: The key legal requirement is that dividends are paid out of profits and the company is solvent at the time of declaration. Failure to declare dividends is not unlawful unless it contravenes these conditions ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"], ["DATO DR SIMON LO @ LO SOO SIANG vs NOVA MULIA DEVELOPMENT SDN BHD & ANOR - High Court"].
References:
In the world of corporate governance, few topics spark as much debate among shareholders and directors as dividend declarations. Imagine a thriving company—profitable, cash-rich, and comfortably passing the solvency test. Does the board have to distribute those profits as dividends? Or can they reinvest them back into the business?
This is a common question: Is it mandatory for directors to declare dividends, or are they able to not declare even if the company is profitable and passes the solvency test? The short answer, based on Malaysian company law, is no—it's not mandatory. Dividend decisions remain largely discretionary. But let's dive deeper into the legal framework, drawing from key cases and statutory provisions to unpack why.
Under Malaysian law, particularly the Companies Act 2016 (CA 2016), there is no legal requirement for a company to declare dividends in any year where profits are made. Declaration is entirely at the company's volition TING TECK SIE vs WONG SEN CHIEW & ORS - 2001 MarsdenLR 117. This principle is firmly established in judicial precedents and company constitutions.
Directors play a pivotal role by recommending dividends, but the ultimate power rests with the shareholders in a general meeting. As one key document notes: The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors TING TECK SIE vs WONG SEN CHIEW & ORS - 2001 MarsdenLR 117. Interim dividends are similarly discretionary: The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company TING TECK SIE vs WONG SEN CHIEW & ORS - 2001 MarsdenLR 117.
This setup ensures flexibility. Profitable companies aren't forced to pay out earnings, allowing reinvestment for growth, debt reduction, or reserves. Courts have consistently upheld this discretion, refusing to compel declarations even in cases of substantial profits from investments GREAT PARTNERS INDUSTRIES LTD & ORS vs KEE HIN VENTURES SDN BHD - 2022 MarsdenLR 495MAGESPARE MAGESWARY MUTHUKRISHNAN vs ANPALAGAN RAMIAH & ANOR; MOSES MOSES PILLAI R SUSAYAN & ANOR .... - 2008 MarsdenLR 477.
Solvency is a restriction on paying dividends, not a trigger for mandating them. Section 443 of CA 2016 prohibits distributions if the company cannot pay its debts. Directors must make a solvency declaration affirming the company's ability to settle debts within 12 months post-distribution GLOBALMARINER OFFSHORE SERVICES SDN BHD & ORS vs TH HEAVY ENGINEERING BERHAD & ORS AND ANOTHER CASE - 2024 MarsdenLR 4397.
For instance, a solvency declaration exposes directors to penalties if unfounded, but it merely enables lawful payments—it doesn't require them GLOBALMARINER OFFSHORE SERVICES SDN BHD & ORS vs TH HEAVY ENGINEERING BERHAD & ORS AND ANOTHER CASE - 2024 MarsdenLR 4397. As emphasized: No dividend may be paid if the company is in a state of trading insolvency... unless the directors can demonstrate... that the payment... would not jeopardise the company's ability promptly to satisfy its creditors ARAH CIPTA SDN BHD vs PIALA GAGASAN (M) SDN BHD & ANOR - 2010 MarsdenLR 1753. Passing the test clears the path, but directors retain choice.
Most company articles of association mirror Table A of the Fourth Schedule to the Companies Act 1965 (now carried forward). Article 98 states: The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors. Article 99 allows interim dividends at directors' discretion TING TECK SIE vs WONG SEN CHIEW & ORS - 2001 MarsdenLR 117.
Article 113 reinforces: The Directors may with the sanction of a General Meeting from time to time declare dividends, but no such dividends shall be payable except out of profits of the Company... No higher dividend shall be paid than is recommended by the Directors PRUDENTIAL CORPORATION HOLDINGS LIMITED & ANOR vs DETIK RIA SDN BHD & ANOR - 2020 MarsdenLR 2352.
Shareholders can't demand dividends unilaterally. Payment of dividend in a company can only be made upon approved by the company. If a shareholder desires dividend... then he must make requisition... It is for the Board of Directors... to decide MAGESPARE MAGESWARY MUTHUKRISHNAN vs ANPALAGAN RAMIAH & ANOR; MOSES MOSES PILLAI R SUSAYAN & ANOR .... - 2008 MarsdenLR 477.
Frustrated shareholders might requisition a general meeting to push for dividends MAGESPARE MAGESWARY MUTHUKRISHNAN vs ANPALAGAN RAMIAH & ANOR; MOSES MOSES PILLAI R SUSAYAN & ANOR .... - 2008 MarsdenLR 477. However, the board still decides, and courts won't intervene absent a legal obligation or breach of fiduciary duties. In oppression claims, failure to declare might factor in, but it's not standalone grounds: The petitioner should... raise the issue of the failure of the company to declare dividends and other matters relating to the conduct... and thereafter commence a petition, if and when, she is able to prove oppression TENG LAI YEN vs RKT TECHNOLOGY SDN BHD & ANOR.
No exceptions mandate dividends based purely on profitability or solvency. Even investment-holding companies with no operations aren't compelled GREAT PARTNERS INDUSTRIES LTD & ORS vs KEE HIN VENTURES SDN BHD - 2022 MarsdenLR 495.
Comparative perspectives, such as Indian tax jurisprudence, align with this discretion. Courts there have ruled that a company's choice not to declare dividends—even over years—doesn't negate investment purposes for tax deductions. That a company in which the shares are purchased does not declare dividend even for a few years is not determinative of the purpose for which the shares are purchased Satish Bala Malhotra VS Commissioner of Income Tax, Jalandhar - 2016 Supreme(P&H) 2042. The focus is on purpose, not dividend payout.
Similarly, under India's Minimum Alternate Tax (MAT) regime, prosperous 'zero tax' companies earning profits and declaring dividends were targeted, implying declaration is optional Dynamic Orthopedics VS Commissioner of Income Tax, Cochin, Kerala - 2010 1 Supreme 649. Provisions like Section 23A of the Income-tax Act, 1922, penalized undue retention but recognized boards' power to withhold Commissioner Of Income Tax, W. B. VS Abdul Raheem Osman And Company India Private LTD. - 1972 Supreme(SC) 452. These reinforce the global norm: dividends are strategic, not obligatory.
For Directors: Document solvency thoroughly before any declaration to comply with CA 2016 s 443(5) GLOBALMARINER OFFSHORE SERVICES SDN BHD & ORS vs TH HEAVY ENGINEERING BERHAD & ORS AND ANOTHER CASE - 2024 MarsdenLR 4397. Review articles for specific limits TING TECK SIE vs WONG SEN CHIEW & ORS - 2001 MarsdenLR 117PRUDENTIAL CORPORATION HOLDINGS LIMITED & ANOR vs DETIK RIA SDN BHD & ANOR - 2020 MarsdenLR 2352. Balance growth needs with shareholder expectations to avoid disputes.
For Shareholders: Use formal requisitions for general meetings MAGESPARE MAGESWARY MUTHUKRISHNAN vs ANPALAGAN RAMIAH & ANOR; MOSES MOSES PILLAI R SUSAYAN & ANOR .... - 2008 MarsdenLR 477. Pursue remedies only if improper withholding breaches duties—courts rarely compel.
General Tip: Consult the company's constitution and seek professional advice tailored to circumstances.
This overview provides general insights under Malaysian law. Laws evolve, and specifics vary—this is not legal advice. Consult a qualified lawyer for your situation.
#DividendLaw
(3) A solvency statement in relation to a transaction is a statement that each director making the statement has formed the opinion that the company satisfies the solvency test in relation to the transaction. ... Such redemption shall be made out of profits, a fresh issue of shares or the capital of the company. The solvency of the company may also be relevant. [42] The test of solvency is set out in s 112 of the ....
Section 133(1) Companies Act 1965 reads: "133. (1) A company (other than an exempt private company) shall not make a loan to a director of the company or of a company which by virtue of s 6 is deemed to be related to that company, or enter into any guarantee or provide any security ... These are provided as follows: "224. (1) A company shall not— (a) make a loan to a director of the company or of ....
The petitioner should, in my view raise the issue of the failure of the company to declare dividends and other matters relating to the conduct of the First Respondent and thereafter commence a petition, if and when, she is able to prove oppression. ... and promise of the Second Respondent to the petitioner that the petitioner shall be the director of company and shall be able to take part in the management of the respondent company'. ... d)#HL_STA....
The petitioner should, in my view raise the issue of the failure of the company to declare dividends and other matters relating to the conduct of the First Respondent and thereafter commence a petition, if and when, she is able to prove oppression. ... and promise of the Second Respondent to the petitioner that the petitioner shall be the director of company and shall be able to take part in the management of the respondent company'. ... Petitioner's....
The petitioner should, in my view raise the issue of the failure of the company to declare dividends and other matters relating to the conduct of the First Respondent and thereafter commence a petition, if and when, she is able to prove oppression. ... and promise of the Second Respondent to the petitioner that the petitioner shall be the director of company and shall be able to take part in the management of the respondent company'. ... Petitioner's....
The petitioner should, in my view raise the issue of the failure of the company to declare dividends and other matters relating to the conduct of the First Respondent and thereafter commence a petition, if and when, she is able to prove oppression. ... Petitioner's counsel submits in this paragraph that the petitioner now faces the daunting prospect of the following: a)Not being able to receive any director fee; b)No dividends; c)No access to the off....
Furthermore, even though the Board of NEP had on 14 September 2020 decided and agreed to have a policy of paying 50% of its profits in dividends, NEP ought to have but failed to declare and pay dividends for the profits of NEP for Financial Year Ended 2020 which recorded a PAT of RM19.866 million. ... ...where... the company is a holding company which does not carry on any business of its own but owns an operating and profitable subsidiary, the cour....
Furthermore, even though the Board of NEP had on 14 September 2020 decided and agreed to have a policy of paying 50% of its profits in dividends, NEP ought to have but failed to declare and pay dividends for the profits of NEP for Financial Year Ended 2020 which recorded a PAT of RM19.866 million. ... ...where... the company is a holding company which does not carry on any business of its own but owns an operating and profitable subsidiary, the cour....
the company is a holding company which does not carry on any business of its own but owns an operating and profitable subsidiary, the court is more receptive to making a winding up order. ... Furthermore, even though the Board of NEP had on 14 September 2020 decided and agreed to have a policy of paying 50% of its profits in dividends, NEP ought to have but failed to declare and pay dividends for the profits of NEP for Financial Year Ended 2020 which....
Furthermore, even though the Board of NEP had on 14 September 2020 decided and agreed to have a policy of paying 50% of its profits in dividends, NEP ought to have but failed to declare and pay dividends for the profits of NEP for Financial Year Ended 2020 which recorded a PAT of RM19.866 million. ... ...where... the company is a holding company which does not carry on any business of its own but owns an operating and profitable subsidiary, the cour....
That a company in which the shares are purchased does not declare dividend even for a few years is not determinative of the purpose for which the shares are purchased. What is entitled to be deducted is the expenditure exclusively for the purpose of making or earning such income.
Therefore, a Minimum Alternate Tax was sought to be imposed on ‘zero tax’ Companies. The whole purpose of Section 115J of the Act, therefore, was to take care of the phenomenon of prosperous ‘zero tax’ Section 115J of the Act imposes tax on a deemed income. Companies not paying taxes though they continued to earn profits and declare dividends.
It can also declare dividends even if there was past losses still remaining to be set off. According to the Tribunal, the company can declare dividends only after setting off depreciation. It was observed that first proviso, clause (b) under section 205 (1) itself starts with a phrase "if the company has incurred any loss in any previous financial year", which means that it refers only to a situation where the net result is a loss after setting off depreciation. The basis for this distinction is that loss is taken to be a charge on the capital, while depreciation is taken t....
On 27 61968 this regulation was altered by means of a special resolution to read as follows: "The company in general meeting may declare dividends, but no dividends shall exceed the amount recommended by the Directors." 5. Regulation.101 of the Articles of Association of the company had originally provided as follows: This regulation was in force when the company was assessed to income-tax up till 1968-69.
In cases where the provisions have not been complied with, the Income-tax Officer with the previous approval and consent of the Inspecting Assistant Commissioner will get jurisdiction to make an order if at the time of the passing of the order it is found that the company has not distributed by way of dividends within twelve months immediately following the accounting year less than the statutory percentage of its total income of the accounting year as reduced by the amount of taxes payable by the company and in the case of banking companies the amount actually carried to a reserve fund unde....
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