• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

L.V. V. Iyer

IN view of the recent spate of revocations of interim dividend payout decisions by various corporates as a fallout of the SEBI fiat on the record date stipulations, there seems to be a controversy arising as to whether such revocation would be valid only when authorised by shareholders.

Various interpretations have appeared in the media that seem to hold out that the Supreme Court's decision in the Indian Express case does not hold water in the light of the amendments to the Companies Act, 1956 in the year 2000. It is pertinent to note that the law declared by the Supreme Court in Dalmia J. v. CIT (1964) 34 Com. Cases 668, AIR 1964 SC 1866, still holds the field. In that case, the Supreme Court had approved the decision in Lagunas Nitrate Co Ltd v. Schroeder and Co and Schmidt, (1901) 85 LT 22: (1901) 17 LTR 625 that the directors have the power to rescind the interim dividend before its payment.

The Companies (Amendment) Act, 2000 has inserted under Section 2, a new sub-section (14-A) which reads as under:

`Dividend' includes any interim dividend. The above insertion appears to have created a controversy by certain sections, in equating interim dividend to dividend declared at the Annual General Meeting for all purposes under the Companies Act.

Section 205, sub-section (1C) reads as under :

The provisions contained in Sections 205, 205A, 205C, 206, 206A and 207 shall, as far as may be, also apply to any interim dividend.

As to what purpose the Legislature intended it to serve can be attempted to be reconciled if one were to understand the import of the words `shall, as far as may be' contained in sub-section (1C) of the said Section. In so far as the requirement laid down under sub-sections (1) and (2A) of Section 205 of the Companies Act, 1956 are concerned, one has to bear in mind that the words used are in relation to declaration or payment of a dividend for any financial year, which is not the case in relation to payment of interim dividend, unless the same is confirmed as final dividend at the general meeting.

Inasmuch as interim dividend stands on a different footing from dividend declared or paid by a company for any financial year, a question could arise as to which provisions of Section 205 of the Companies Act, 1956 would apply in relation to interim dividend.

The matter appears to be resolved if one were to resort to the import of the words `shall, as far as may be' contained in the sub-section (1C) which would operate to limit the applicability of Section 205 of the Companies Act, 1956 to the newly inserted sub-sections (1A) and (1B) of the said section.

However, in view of the applicability of Section 207 of the Companies Act, 1956 to interim dividend, under which penalty for failure to despatch warrants within 30 days of its declaration has been prescribed, going by the salutary principle that in law nobody can take advantage of his own default, directors would have the power to rescind the payment of dividend only up to the 29th day of its declaration and not thereafter, since after the 30th day it becomes a statutory default.

The Supreme Court of India in the CIT v. Express Newspapers Ltd (1998) 3 SCC 106, cited with approval the above cases of Dalmia v. CIT and Lagunas Nitrate Co Ltd v. Schroeder and Co and Schmidt for the purpose of bringing out the difference in the nature of interim dividend and the dividend declared by the company at its general meeting.

In the case of Dalmia v. CIT, the Supreme Court held that a mere resolution of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of the dividend.

A similar view was taken in the case of Lagunas Nitrate Co Ltd v. Schroeder and Co and Schmidt. Supporting the observations made in the aforesaid cases, the Supreme Court in the CIT v. Express Newspapers Ltd held that the nature of the interim dividend is such that it gives no right to the shareholders to receive it merely on the passing of the resolution by the board of directors whereas on a dividend being declared by the company in a general meeting, a vested right accrues to the shareholders.

The changes in the Companies Act, 1956 put into effect during the year 2000 have not changed the legal position insofar as it relates to the power of the board of directors of a company to revoke a interim dividend declared before it is paid out and to avoid interim dividend being declared a statutory default, such revocation would have to be done on or before the 29th day of its declaration by the board.

(The author is a corporate lawyer)

Send this article to Friends by E-Mail

Stories in this Section
Bajaj Auto cancels interim dividend

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line