Aspects of The Law Relating To Company Dividenps
| Date | 01 April 1941 |
| Published date | 01 April 1941 |
| DOI | http://doi.org/10.1111/j.1468-2230.1940.tb00779.x |
LAW RELATING TO COMPANY DIVIDENDS
273
ASPECTS
OF
THE
LAW
RELATING
TO
COMPANY DIVIDENPS
HE
development of the joint stock company with limited
liability has enabled the small owner of capital to partici-
T
pate in large scale business enterprises. With the demo-
cratisation of investment increasing numbers of individuals
depend, for part of their incomes, on dividends received from
joint stock companies.
A
study
of
the law relating to company
dividends, which may affect the magnitude
of
the incomes
of
a
considerable section of the community, is therefore
of
some im-
portance. Such
a
study is interesting, too, because in this field
the law has had to contend with problems which are more
directly within the province of another profession, accountancy,
the rise of which is closely linked with the development of the
company.
The main problem in the law relating to campany dividends
is
the establishment of satisfactory criteria for the determina-
tion of the
size
of the dividend fund.’
It
is the purpose of this
paper to consider to what extent
and
in what manner the
law
has laid down the necessary criteria. Further, to indicate
whether the criteria may be considered satisfactory or not,
some of the consequences of the present state of the law will
be
considered.
From the legal criteria
it
should be possible to decide, firstly
which categories
of
a
company’s receipts and which increases in
the values
of
its
possessions may be included in the calculation
of the dividend fund. There should also be an indication of the
categories
of
expenditure and declines
in
asset values which have
to appear as subtracting items in the computation of the dividend
fund.
It
is
not intended to discuss the legal decisions on the
first
point
in any detail.
It
is
sufficient to point out that the
decisions in
Lccbbock
v.
British Bank
of
Sodh
Americaa
and
Foster
v.
New Trinidad Lake Asl!&alte
Co?
make
it
clear that
all
the receipts
of
a company, other than those connected with the
issue of its shares to its shareholders, may
be
included as positive
items in the calculation of the dividend fund, The problem is
accordingly simplified
so
that
it
is only necessary to ascertain
1
“Dividend
Fund,”
as
used here, does not refer
to
the actual
stock
of
cash
out
of
which dividends
can
be paid.
It
is
used to indicate the maximum amount
which, according
to
the legal criteria,
may
be
paid out
to
shareholders
as
dividends,
irrespective of whether there is sufficient cash
or
not.
a
(1892),
2
Ch. 198.
(1901).
I
Ch. 208.
274
MODERN LAW REVIEW April,
1941
the nature of the items which, in any period, have to be sub-
tracted from the receipts of that period.4
1.
The
Development
o!
Dividend
Rules
Nowhere in the succession of Companies Acts can any direct
reference to the nature of the dividend fund be found. The
Legislature has thought
it
unnecessary or unwise to lay down
definite rules or even general principles for the computation of
the fund.
It
has been left to the judges to settle the questions
which were bound to arise. The judges, however, could not
or
were not disposed to devise rules without attempting to justify
them by reference to the supposed intentions of the Legislature,
on
a
matter on which
it
had never expressed
its
opinion.
It
was
believed that the Legislature’s views on dividends could be
divined from the tenor and general provisions of the Acts. And
history has shown that
a
reading of the Acts could suggest
different intentions on the part of the Legislature to different
judges.
A single unifying idea runs through the decisions
in
dividend
cases before the year
1889.
This idea was premised on the view
that the provisions of the Acts regarding the capital of
a
com-
pany, and more especially
its
reduction, made it clear that the
Legislature would have frowned upon any dividend payment
which would have left the company with
a
sum of assets less, in
value, than
its
nominal paid-up capital.
It
was argued that the
paid-up capital
of
a
company could be used only for the further-
ance of the declared objects
of
the company, which did not
include the return to the shareholders of the capital they had
subscribed. Moreover, the statutory ban on the reduction of
capital, except under the strict supervision of the Courts, was
held to imply that
it
was not legal to reduce the capital by
returning
it
to the shareholders, without safeguards, in the guise
of dividends. The argument is clearly stated by Jessel, M.R., in
Im
re Exchaqe
Bafiking
Com+any
(Flitcroft’s case)
“A limited
company by
its
memorandum of association declares that
its
capital
is
to be applied for the purposes of the business.
It
cannot
reduce
its
capital except in the manner and with the safeguards
provided by statute, and looking
at
the Act
40
&
41
Vict. c.
26,
it
clearly
is
against the intention of the Legislature that any
portion of the capital should be returned to the shareholders
without the statutory conditions being complied with. A limited
4
The judgment
in
Ammonia
Soda
Com#any
Ltd.
v.
Chamberkin (1918),
I
Ch.
266,
suggests that some increases
in
the value
of
a company’s assets may
be
added
to
the current receipts.
See
below,
p.
284.
(1882),
21
Ch.D. 519 at
p.
533.
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