New test governing payment of dividends

Thursday 22 July 2010

The Corporations Amendment (Corporations Reporting Reform) Act 2010 (Cth) (Amending Act) received Royal assent on 28 June 2010. The Amending Act includes an important amendment to section 254T of the Corporations Act 2001 (Cth) (Act) which governs the circumstances in which companies may pay dividends.

Nature of the amendment

Under the former section 254T of the Act (prior to 28 June 2010) a company could only pay dividends out of its profits. This was known as the "profits test".

The new section 254T replaces the profits test with a new 3 tiered test, which provides that a company must not pay a dividend unless:

  • the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend
  • the payment of the dividend is fair and reasonable to the company's shareholders as a whole
  • the payment of the dividend does not materially prejudice the company's ability to pay its creditors.

Practical implications

Many company constitutions have provisions which mirror or complement the old section 254T test in relation to dividends. For example, it is common for company constitutions to include a provision to the effect that "dividends may only be paid out of the profits of the company".

To the extent that a company's constitution is inconsistent with the new test in section 254T it will need to be amended.

Recommended action

All companies should arrange for a review of their constitution to ascertain whether any amendments are required in light of the introduction of the new test in section 254T of the Act.

In particular, ASX-listed companies holding AGMs in the near future should move quickly to ensure that any necessary amendments to their constitution are included in the notice of AGM and shareholder approval can be sought at the AGM.