Zenith Ltd. has inadequacy or absence of profits in the financial year 2014-15 but it wants to declare dividend. What are the conditions to be fulfilled to declare dividend out of free reserves?

Zenith Ltd. will have to fulfil following conditions as per Second Proviso to Section 123 (1) of the Companies Act 2013 for payment of dividend: In case of inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with the Companies (Declaration and Payment of Dividend) Rules, 2014. Rule 3 provides that in the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfilment of the following conditions, namely: - The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. However, this shall not apply to a company, which has not declared any dividend in each of the three preceding financial year. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.