Prohibited if material prejudice to the interests of

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security over the company’s assets, releasing a debt owing to the company. Prohibited if material prejudice to the interests of the company or its shareholders or its ability to pay its creditors C. Dividends How are dividends paid? The payment of dividends is regulated by the coy’s constitution and/or replaceable rules and by the Corp Act.
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Unde s 254U is a replaceable rule that provides the board of directors with the power to determine: That a dividend is payable When the dividend amount is due to be paid; and How the dividend will be paid (e.g. cash, shares or options) Constitution of company: BTR Nylex Ltd v Churchill International Inc (1992) 9 ACSR 361: Corporate constitution will normally set out process for, and any limitations on, the payment of dividends. It is not permissible for dividends to be paid inconsistently with the requirements of the coy’s constitution. The improper payment of a dividend can give rise to an action for insolvent trading, a breach of director's’ duties or perhaps a breach of the capital reduction rules. Dividend rights: Where a company makes a profit it may be retained to finance growth - or returned to members - for example by authorised capital reduction, by issuing bonus shares or, most commonly, by payment of a dividend (Directors are not obliged to pay a dividend) QBE Insurance Group Ltd v ASC (1992) 38 FCR 270 : It is important to note that members have no general right to the payment of dividends. The directors are not bound to use the coy’s profits to pay a dividend. The mere failure to pay a dividend will not ordinarily amount to oppression of the members. Declaring a dividend and incurring a debt: s524v (2): debt incurred when dividend declared s524v (1): debt incurred when time fixed for payment arrives; decision may be revoked at any time before then s588G(1A): If no express provision, debt incurred when dividend paid Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 (HCA) : The declaration of an interim dividend does not, however, create a debt owing by the coy to the members. Decision to pay may be revoked under s254V(1). Section 254T: When may a dividend be paid Balance sheet test: “the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend” Fair to shareholders: “the payment of the dividend is fair and reasonable to the company’s shareholders as a whole” No material prejudice to creditors: “the payment of the dividend does not materially prejudice the company’s ability to pay its creditors” Invalid dividend payments Most likely constitute a breach of director’s common law and statutory duties of care May be a breach of maintenance of capital rule, in particular authorised capital reduction provisions in Pt 2J.1 Directors themselves may have to pay: ss588G, 588M Statutory injunction possible: s1324 Lecture 9: Accounts, Reports and Audit A. Accounts Case Law on profit - Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 (CA): ‘Profits ’ implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the
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amount of gain made by the business during the year.
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