Distributions

Part 3 – Share Capital, Shares and Certain Other Instruments

Profits available for distribution:

Section 117 is a re-enactment of the familiar Section 45 of the C(A)A 1983. It states that a company “shall not make a distribution except out of profits available for the purpose.”

The section goes on to set out the rules in relation to the calculation of profits available for distribution. The law is unchanged here. Prior to the enactment of this rule in 1983, a company was able to declare a dividend out of profits earned in a given year without having to take into account losses made in previous financial years. This was seen as a distribution out of capital, and a breach of common law principles.

A company’s profits available for distribution are “its accumulated realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.”

No amount of the accumulated profits or losses attributable to any shares in a subsidiary should be treated in the holding company’s financial statements as profits available for distribution, if the amount relates to accumulated profits or losses for the period before the date when the shares were acquired (Section 118).

Distributions in kind are dealt with in Section 119.

Development costs carried as an asset in a CLS’s balance sheet should be set off against the CLS’s distributable profits (Section 120). The two exceptions to this rule are set out in Section 120(2) and (3).

The relevant financial statements are dealt with in Section 121 and the law is unchanged in this regard. The provisions are drawn from Section 49 of the 1983 Act.

The rule relating to the consequences of making an unlawful distribution is also unchanged. The old section 50 of the 1983 Act can now be found at Section 122.

The payment of dividends is provided for in Section 125. These provisions will apply where the company’s constitution has not stipulated otherwise. The Law in this area is a re-enactment of some of the old Model Regulations of the 1963 Act.

The same can be said of Section 126, which deals with bonus issues, and is also a re-enactment of some of the old Model Regulations of the 1963 Act. The only new item is the introduction of a definition for the phrase “relevant sum”; this was done to improve readability. It is defined as any sum standing to the credit of the company’s undenominated capital or the company’s profit and loss account.

Practitioners should also note the provision for dealing with the net capital surplus which is in excess of the previous book value of the assets, where a revaluation of the fixed assets of the company has taken place. This can be found here (Section 126(9)). It is a provision that used to form part of the Companies Acts, was repealed, and is re-enacted to provide greater clarity.