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.

Dividends can be distributed in a form of
1. Cash dividend.

2. Share dividend (bonus issue).

3. Set-off against the amount owing.

4. Dividend in specie (transfer asset).

5. Dividend Reinvestment Plan.

Types of dividends

Interim Dividend : Declare for a short period of 3 or 6 months, paid in the current accounting period and based on the company’s profit performance before the end of the accounting period.

Final Dividend : Final dividends are paid once a year, with reference to the latest company’s audit.

Special Dividend : Usually paid for special occasions/super profit year.

Powers to declare dividends:
i. Company with constitution – Interim dividend, declared by the board. Final dividend- declared by the shareholders (usually based on board recommendation through general
meeting or by passing a written resolution)

ii. Company without constitution – Declared by the board

Benefits of distributing dividends to shareholders
1. Rewarding Loyalty: Dividends serve as a way to acknowledge and reward shareholders for their commitment to the company over time.

2. Certainty of Financial Well-being: Dividend payments can offer shareholders a clear sense of the company’s stable financial position and its ability to generate profits.

3. Attracting Investors: Regular dividend payments can attract more investors to the company’s shares, generating increased demand in the market.

4. Communication of Strength: By paying dividends, a company conveys a strong and direct message about its overall performance, prospects, and indirectly showcases its financial robustness.

Circumstances where dividend payment is not viable:
1. Solvency Concerns: If, between the authorization and execution of a distribution, the directors lose their confidence, based on reasonable grounds, that the company will remain solvent after the distribution, they must take appropriate measures to halt the distribution.

2. Consequences of Improper Distribution: Besides other potential legal liabilities, any director or officer who knowingly allows or oversees the payment of an improper or illegal distribution canbe found guilty and could face imprisonment of up to RM3 MILLION or both.

In essence, distributing dividends brings numerous advantages by appreciating shareholders, providing financial clarity, drawing in more investors, and conveying positive messages about the company’s health. However, in cases where solvency becomes uncertain or distributions are handled improperly, strict measures are in place to prevent such actions and hold responsible parties accountable.