In the Companies Act 2016, the guidelines for distributing dividends can be found in section 131. This section is based on two fundamental principles:

1. Dividends must be paid using the company’s profits.

2. Dividends should not be paid if their payment would render the company insolvent. As the responsibility for authorizing dividend payments falls on the directors, they must ensure that the company remains solvent even after distributing dividends.

Section 133(2) outlines the legal liability of directors and managers who intentionally authorize or allow dividends to be paid out of what they knew were not actual profits. They become accountable to the company for the amount that exceeds the value of legitimate dividend distribution. The Companies Act 2016 also introduces a new liability for company members. Section 133(1) specifies that the company has the right to reclaim the excess amount of dividends that a
shareholder received if it surpasses what could rightfully have been distributed. This is applicable unless the shareholder can demonstrate two things:1. They received the dividends in good faith.

2. They were not aware that the company did not meet the solvency requirements. In essence, the Companies Act 2016 establishes rules for dividend distribution centered around the
utilization of profits and the prevention of insolvency. It holds directors, managers, and shareholders accountable to ensure dividends are paid properly and within legal bounds.