Section 127 Of Companies Act 2013: Punishment for Failure to Distribute Dividends

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 among shareholders
2. Profit-sharing regardless on fix rate or a variable one
3. It can be paid on preference or equity share

Punishment for Failure 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 offence, 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 offence 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.

FAQ’s

1. What if dividend is not paid within 30 days?

The company shall also be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues (Sec. 127).

2. What are the Important Dividend Dates?

• Declaration Date. The declaration date is the date on which the board of directors announces and approves the payment of a dividend. …
• Ex-Dividend Date. The ex-dividend date is the first day that a stock trades without a dividend. …
• Record Date. …
• Payment Date.

3. What is the 45 day dividend rule?

You must hold the shares or interest for 45 days (90 days for certain preference shares) excluding the day of disposal. For each of these days you must have 30% or more of the ordinary financial risks of loss and opportunities for gain from owning the shares or interest.

4. What is the time duration from the date of declaration within which shareholder can claim the declared dividend?

Prepare a statement of dividend in respect of each shareholder and it must be ensured that the dividend tax is paid to the tax authorities within the prescribed time. Separate Bank Account is required to be opened and amount of dividend payable shall be credited to the said account within 5 days of declaration.

5. What are the punishment to company for failure to distribute dividend to the shareholders?

However, if declared dividend has not been paid on time, a warrant may be dispatched in respect thereof within thirty days of the declaration of dividend of a company. In case of joint shareholders, dispatch the dividend warrant to the first named shareholder.

6. Can a company fail to pay dividends?

There is no legal obligation on a company to declare dividends. Even if there are available profits for distribution, the directors may decide not to declare a dividend if this is not in the best interests of the company.

7. Can you force a company to pay dividends?

Companies do not always pay dividends to their shareholders. A company doesn’t necessarily have to pay dividends to its shareholders. Whether they pay a dividend or reinvest into the company is up to the directors to decide. But if it does, they must have sufficient net profits to do so.