Anil, Sunil and Vaishali are close friends from a renowned business family. After doing their masters from IIM, Ahmadabad they decided to start e-commerce in commodities. However, they were not sure about the legal forma

CS Executive · Company Law and Practice · PYQS · December 2023
Anil, Sunil and Vaishali are close friends from a renowned business family. After doing their masters from IIM, Ahmadabad they decided to start e-commerce in commodities. However, they were not sure about the legal format in which they should start the business. On request, M/s AB & Associates, a firm of practicing Company Secretaries advised them to form a company limited by shares being the best suitable device for running the business. After complying with the legal formalities, the company in the name and style of "Dynamic E-Commerce Ltd." (hereinafter referred to as "the Company") was incorporated on 1st April, 2020 by seven subscribers (including Anil, Sunil and Vaishali) to the Memorandum and Articles of Association of the Company with the main object of carrying e-commerce in grains, grocery, and medicines throughout India. The registered office of the company is situated in Pune, the State of Maharashtra (India). The capital clause of the Memorandum of Association (MOA) provides as under: "The authorised share capital of the company shall be ₹1,00,00,000" The Articles of Association (AOA) contain the capital clause as below: "The authorised share capital of the company shall be ₹1,00,00,000 divided into 8,00,000 equity shares, carrying voting rights pari-passu of ₹10 each and 20,000 preference shares of ₹100 each." The company offered preference shares to the financial institution, its promoters, and a group of individuals on which rate of dividend shall be 10% as per the term of issue. The financial institution refused to subscribe to the issue of preference shares on the contention that MOA is ambiguous as it does not authorise the company to issue class of preference share and hence the act of offering preference shares is ultra vires the company. Considering the growing business, the company wants to shift its registered office from Pune to Mumbai in the State of Maharashtra (India). The Managing Director of the company has been apprised by the Legal Officer that the company may shift its registered office, as proposed, by passing a unanimous board resolution and filing necessary forms with the Registrar of Companies. Encouraged with the financial results of last three years the Board of directors of the company intends to declare interim dividend for the first time in its next board meeting to be held on 31st May, 2023 out of the profit earned for the year 2022-23. The balances extracted from the financial statement for the preceding year are as below: Particulars Financial Results for the year ending 31st March, 2023 (in lakh) Net Profit for the year after depreciation but before interest and tax (NPBIT) 80.00 Charge of Interest on the profit on term loan 5.00 Fully Paid-up equity share capital 60.00 Fully Paid-up Preference share capital 16.00 Free Reserves 10.00 Term Loan 50.00 Contingent Liabilities for which profit is to be set aside 24.65 Assume Income-tax provision @ 25% Based on the above facts answer the following: Referring to the provisions of the Companies Act, 2013 read with Secretarial Standard-3 (SS-3) and requirement of the Board. Explain the meaning of "Divisible Profit" and can interim dividend be paid by the company out of free reserves, in the event of loss or inadequacy of profit during a financial year?

Answer & Explanation:

Divisible Profit: 'Divisible profits' means the profits which the law allows the company to distribute to the shareholders by way of dividend. According to Palmer's Company Law, the terms 'divisible profits' and 'profits in the legal sense' are synonymous. Thus, the profits of a business mean the net proceeds of the concern after deducting the necessary outgoings without which those proceeds could not be earned. [Bharat Insurance Co. Ltd. v. CIT (1931) 1 Com Cases 192, 196 (Lah)]. Divisible profits are that portion of the profit which can be distributed legally among the shareholders of the company. These profits are distributed by way of dividends, but only after provisions for past losses and reserves have been made. Interim Dividend: As per Section 123(3) of the Companies Act, 2013, the Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend. In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. It is also provided in Article 81 of table F that Subject to the provisions of section 123, the Board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company. Therefore, before approving payment of interim dividend, the directors should satisfy themselves that the profit is available for distribution by way of dividend. SS-3 provides that in the event of a loss or inadequacy of profits during a financial year, no Interim Dividend shall be declared/ paid out of Free Reserves. Hence, in this case interim dividend cannot be declared by the Board of directors.

Topics: Company Law

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