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Decisions of the courts demonstrate a willingness to

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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
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