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Section 127 Of Companies Act 2013: Failure to Distribute Dividends

Updated: Jun 24


Definition of Dividend


The term "dividend" is defined under Section 2(35) of the Companies Act of 2013. The name 'dividend' comes from the Latin word 'dividend,' which means 'items to be divided.' In basic terms, it refers to the percentage of a firm's net profit that is not preserved by the company once it has successfully obtained company registration. This profit is then distributed among the company's shareholders in proportion to their shareholding percentage.


Section 2(35) of the companies act, 2013 has defined the term dividend as which includes any interim dividend i.e.:


  1. Share proportion diffuse amidst shareholders

  2. Profit-sharing regardless on fix rate or a variable one

  3. It can be paid on preference or equity share


The Penalty for Failing to Distribute Dividends


A penalty may be levied on a corporation if it fails to comply with the terms of the Companies Act and fails to distribute dividends to its shareholders. According to Section 127 of the Companies Act, 2013, if a company fails to pay a dividend within 30 days of the declaration of the dividend, the company, as well as the directors, may be fined.


A fine of Rs. 1000/- per day for the entire default period can be imposed on a company in terms of interest at 18 percent per annum from the date of default, and it can also be imposed on a director who is also committing a criminal offense, which can result in imprisonment for up to two years and a fine of Rs. 1000/- per day for the entire default period.



Exceptions

Certain exceptions have been given to the companies which don’t comply with the provisions of Section 127 of the Companies Act, 2013 as mentioned below:


  • In a scenario where the company is not able to pay dividends due to any issue in the operation of law.

  • When directions have been given by a shareholder to the company regarding the division of dividend but that directions cannot be followed due to certain reasons and same has been informed to him.

  • When the dividend part of a shareholder has been adjusted by the company against payment already done to him.

  • When a company has complied with all the provisions of law w.r.t. to dividend, and there is no fault from the company side.

  • When there is a dispute in regards to the division or payment of dividend among shareholders or company and the same is pending resolution.


Conclusion


Many precautions have been taken to prevent any dividend division and payment defaults. In the event of shareholders, nonpayment of the dividend within the stipulated time has been constituted a criminal offense with a penalty. However, many businesses continue to ignore these laws. Even though certain exceptions exist, it is the responsibility of every firm and every shareholder to respect the law's regulations regarding dividend distribution and payment.



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