Dividends the Companies Act 2016

Dividends the Companies Act 2016
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Dividends the Companies Act 2016

Continuous learning is part of our company culture…

We attended an external webinar on “Everything About Dividends” from Ms Leong Ai Wah on 11 November 2022.

The key takeaway from the webinar:

a) Dividend distribution requirements.

b) How is available profit determined?

c) Powers to declare dividends.

d) Dividend policy

e) Solvency test can be cashflow or ratio

f) Dividend distribution method

Summary of learning

Here is the summary reflected in the webinar is dividends can only be distributed to shareholders if the company has available profit and solvency.

Most of the time we focus on retained earnings, but in fact, the profits for the year can also be used to determine dividend distribution.

The power to declare dividends differs between companies with constitution and those company without constitution. The companies with constitution will be determined by the board of directors and followed by members at the annual general meeting. For companies without constitution, the decision is made only by the board of directors.

Dividend Policies

Dividend policies are divided into 3 categories namely Residual, Stable and Hybrid. The Residual policy is that dividends are paid only when all capital requirements are met, but with the Stable policy, dividends are paid annually regardless of earning fluctuations. However, the Hybrid policy is a combination of Residual and Stable.

Solvency Test

Typically, most of us assess a company's solvency by preparing a cash flow statement for the next 12 months from the payment date. In fact, in addition to the cash flow statement, we can also use the 3 ratios to do the solvency test. There are quick ratio, current ratio and solvency ratio.

Payment Mode

As we know, cash dividends are the most common payment method. In fact, there are any other payment methods, such as share dividends, also known as bonus issue. It will be paid up in full or in part non-cash using shares allocated or deemed allocated.

The third is set-off again amount owing, for example a company can declare a dividend to offset what is owed by shareholders.

Fourth, dividend in specie, also called the transfer of assets is also one of the mode of payment for distribute dividend. For example, land. The land is allocated according to the shareholders' shares.

Lastly, there are dividend reinvestment plans, which are plans that allow shareholders to reinvest cash dividends in additional company shares.

Thanks to the speaker – Ms Leong Oi Wah for hosting this webinar and giving us a clear picture of the dividend.

Authored by Caroline Teo, our assistant manager of the firm in our Group in her personal LinkedIn. http://bit.ly/3UQh5fE

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