Decisions of the courts demonstrate a willingness to

Info icon This preview shows page 6. Sign up to view the full content.

View Full Document Right Arrow Icon
Decisions of the courts demonstrate a willingness to have a very broad definition thus creating an expansive fund from which the company may pay dividends to shareholders (1) Increase in value of assets at the end of a period compared with the value at the beginning o This approach is based on the early decision of {Re Spanish Prospecting Co} o If the company’s net asset position had improved, a ‘profit’ had been made and could be distributed in the form of a dividend o Whilst this broad approach looks at profit over a period, it apparently includes increases in value of all assets not just circulating assets (2) Profit is calculated over a relevant period and so what occurred over previous periods is irrelevant o This approach means that in determining whether a company can declare a dividend, attention is focussed solely on the company’s performance over the most recent appropriate period o The company is not obliged to make up past losses before it can declare a dividend o More in line with accounting concept of profit rather than capital maintenance approach (3) Realised capital gains (profits made on the sale of fixed assets) can be taken in to account in calculating a company’s profit o This is from {Australiasian Oil Exploration Lt v Lachberg} o It has been suggested that a realised capital gain can only be used to pay a dividend if the company’s overall position shows that its net assets exceed its paid-up capital (4) Capital losses can be ignored for the purpose of determining whether a company has made a profit o This is from {Lee v Neuchate Asphalte Company} (5) Dividends could also be distributed from unrealised capital gains o Unrealised capital gains occur where a capital asset has been revalued upwards but not sold (thus gain is unrealised) o It has been suggested that unrealised capital gain could be used to distribute dividends in the form of bonus shares o In { Dimbula Valley (Ceylon) Tea Co v Laurie} i t was suggested that cash dividends could also be paid from unrealised capital gain provided: (a) the valuation was in good faith by a competent valuer (b) the increase in value was not merely a short term fluctuation (c) the constitution allowed payments of such a dividend (d) ALL the assets are revalued Even if the company has ‘profits’ it appears that it cannot pay a dividend if it is insolvent {QBE Insurance Group Ltd v ASC} G.4 Consequences of Breach If a company pays a dividend other than from profits, it will have returned share capital Thus the consequences that follow from an unauthorised reduction in capital are as above Also note that the insolvent trading provisions apply and are particularly relevant where determining when the debt for the dividend payout is incurred {s 254V Corporations Act} 6
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern