3.24 Query
Treatment of Unpaid Dividends under Section 205 A of the companies Act, 1956. The Company law and Industrial Affairs sub-committee of this Chamber has had occasion to discuss at length the interpretation of unpaid dividends Section 205A of the Companies Act, 1956. We enclose in this connection copies of the following:-
1. Letter dated 15-12-1975 from M/s. XYZ, Ltd.
2. Extract of the proceedings of the Company Law and Industrial affairs sub-committee meeting held on 7th May, 1976, which discussed and dealt with the above letter.
3. Copy of further letter dated 21-5-76 from M/s. XYZ, Ltd
4. Copy of the legal opinion of M/s C and Co, forward by M/s. XYZ, Ltd.
5. Copy of our reply based on the discussions at the company law & Industrial Affairs sub-committee meeting held on 28th July, 1976. While discussing in some detail the interpretation of unpaid dividends in the context of the matters raised by a constituent member of the chamber and the legal opinion tendered in support, the sub-committee noted that the present accounting convention adopted differing treatment in the matter of dealing with cheques and dividend warrants although they are almost identical instruments for settlement of the company’s liability for payment of dividends. While cheques issued and posted in payment of dividends are immediately recorded in the company’s books of accounts as transactions a similar treatment is not given for dividend warrants posted to the shareholders.
The problem has assumed some importance in the context that section 205A(5) of the Companies act is unambiguous that unpaid dividend excludes dividends in respect of which dividend warrants have been posted.
In the circumstances the members of the sub-committee felt that the problem of interpretation in regard to ‘unpaid dividend’ referred to in Section 205A(5) and the none-too-logical treatment of dividend warrants as distinguished from cheques could both be dealt with effectively if companies were to pass entries in their books of account in respect of dividend warrants issued and posted in the same manner as they do when cheques are issued and posted.
It will be seen from our reply dated 20th August, 1976 to M/s. XYZ Ltd., that we recommend that practice being adopted by the company in the manner set out in that letter. A very significant feature of passing the entries as recommended would be that a separate transfer to a dividend account of the aggregate dividend immediately after it is declared by the company would not be necessary although this procedure followed by many large companies is still considered by the sub-committee as a very salutary procedure. I have been directed to bring this correspondence and the views of the sub-committee to your attention with a request that this matter be considered by the Institute for issue of such authoritative guidelines as may be appropriate. XYZ LIMITED
15th December 1975
ABC Chamber of Commerce & Industry,
Dear Sirs, Section 205(A) (1) of the Companies Act, 1956—Unpaid Dividends. Enclosed is a copy of our letter No.Sec/538/75 dated 10-12-1975 to the Registrar of Companies, Madras, and copies of earlier correspondence on this subject between the Registrar and the company. The correspondence arose out of our filing a special resolution passed at out Company’s 26th Annual General Meeting. The resolution reads as follows:
Special Resolution passed at the Twenty-sixth Annual General Meeting on June 9 , 1975.
Article 156 shall be deleted and the following substituted therefor, namely:
“All dividends unclaimed for three years after having been declared may be forfeited by the Board for the benefit of the company. But such forfeiture may, at any time, be annulled by the Board in appropriate cases.”
Article 156 which was deleted by this resolution provided as follows:
“All dividends unclaimed for six years after having been declared may be forfeited by the Directors for the benefit of the company provided that no unclaimed dividend will be forfeited before the claim becomes barred by law. But such forfeiture may, at any time, be annulled by the Board of Directors in appropriate cases.”
By the Special Resolution referred to above, what the company had done was only to amend the existing Article, and the effect of the amendment was only to reduce the period after which ‘unclaimed’ dividends may be forfeited by the Board, from six years to three years which is in accordance with the current period of limitation. The Registrar by his letter No.2905/TA.2/F.23/75, dated August 14, 1975 commenced the correspondence and desired to know how the resolution passed by the Company could be reconciled with Section 205A. Copies of the correspondence enclosed explain the views exchanged on the subject. We shall be grateful if you can kindly obtain a clarification from the Company Law Board on the question whether in cases where the Company posts the dividend warrants within 42 days of declaration of dividend to the Shareholders, the Company is deemed to have paid the dividend and if the Shareholder does not encash the warrants, whether the company is required to pay such unclaimed dividends into the special account with a Scheduled Bank. It is our view that when the company posts the warrants as laid down in Section 205A(1), it is deemed to have paid the dividend. Such dividend is not ‘unpaid’ but only ‘unclaimed’ and accordingly the company need not transfer such dividend amount to a special account in a Scheduled Bank.
Yours faithfully, Sd/- for XYZ Ltd.
Extract of the proceedings of the Company Law and Industrial Affairs sub-committee on the letter Dated 15th December 1975, from M/s. XYZ Ltd. The company had adopted an Article empowering the company to forfeit the dividends which remained unclaimed for three years after declaration. The resolution adopted by the company had substituted an article which had empowered them to forfeit such unclaimed dividends after six years. The Registrar of Companies had held that the Article adopted by the company ran counter to Section 205A of the Companies Act. The company had enquired whether the stand taken by the Registrar was correct. The company had taken the stand that where dividend warrants had been posted, after the declaration of dividend, within the prescribed period, if such dividend warrants remain unencashed, they would be “unclaimed dividends” and had sought by the adoption of the above Article, to keep the funds relating to such dividends in the company itself and also to forfeit them at the expiry of three years. The Registrar had taken the position that the article was null and void and he had refused to register the same. A member drew the sub-committee’s attention to a clarification given by the Company Law Board on this point to the effect that even where dividend warrants have been posted within 42 days from the date of declaration of dividend, any balance remaining unpaid will have to be transferred to the special bank account within 7 days from the 42nd day. The clarification was given by the Company Law Board to the Indian Merchants’ Chamber and had been circulated to all members in Chamber Circular No.119C/76 dated 26-3-1976.
The sub-committee decided to abide by the clarification and advise the member accordingly. A question was raised by a member whether the Registrar could interpret the Act to refuse registration of resolutions which were null and void according to his interpretation of the Act. The sub-committee was of the opinion that the Registrar had the right of refusing to register resolutions which he considered bad in law. Letter dated 21st May ,1976, from M/s. XYZ Ltd. Thank you very much for your letter dated 11th May, 1976 clarifying that under Section 205A(1) the Company has to transfer to the Unpaid Dividend Account of the Company even dividends in respect of which the dividend warrants have been posted by the company but for some reason have not been encashed by the shareholder. It is our view that if it is to be established that the intention of the legislature is to include such dividends also within the definition of “Unpaid” dividends, the language of the Section should be suitably changed to reflect that intention. Either the Section should be amended as reading “…. dividend has been declared by a company but has not been paid or the warrant has been posted but not realised ….” Or an explanation to the effect that “Unpaid includes unrealised dividends” should be added to the Section. We are unable to agree that the word “Unpaid” in its ordinary meaning, and in the context of the wording of the Section would also mean unrealised. The Section, as it stands, is unambiguous as to its import, namely that once the dividend warrant is posted it is sufficient compliance and would be deemed to be or equivalent to payment of dividend. From this point of view, the Section calls for no interpretation as to import any new idea which is not intended to be implied. We find that you have not given us your opinion on the other point referred to you by us viz., amendment of the Company’s Articles of Association empowering the Board to forfeit unclaimed dividend after a period of three years (instead of six years). We would be thankful if you would kindly let us have your opinion on the points raised by us and if need be, to take them up with Company Law Board for clarifications.
Opinion given by M/s. C& Co. on Section 205A of the Companies Act 1956. The question on which our advice is sought is as to what is “Unpaid Dividend” required to be transferred to an “Unpaid Dividend Account” under sub-sections (1) and (2) of Section 205A of the Companies Act, 1956 (“the Act”).
The facts giving rise to the above question are briefly summarised as follows: At its Annual General Meeting held on June 9, 1975, the Company declared a dividend in respect of the year ended December 31, 1974.Application for remittance of the dividend to the P & Co. Limited, London, a non-resident shareholder, was only made in the Reserve Bank of India but the Reserve Bank of India’s approval to the remittance of the dividend has not yet been received. The Company has an amount of Rs. 15,744.43 in an ‘Unclaimed Dividend Account’ representing unclaimed dividends declared by the company for the years prior to the year ended December 31, 1974, the dividend warrants in respect of which were posted as and when the dividends were declared. In answering the aforesaid question it is necessary to consider the provisions of Section 9 of the Foreign Exchange Regulation Act, 1973, (FERA) and Section 205A of the Act. Section 9(1) of FERA provides that save as may be provided in and in accordance with any general or special exemption from the provisions of this sub-section which may be granted conditionally or unconditionally by the Reserve Bank, no person in or resident in India shall—
(a) make any payment to or for the credit of any person resident outside India”. No general exemption has been granted by the Reserve Bank authorising payment of dividend to non-residents and no special permission has been received by the company for payment to its shareholders of the dividend payable to them. Until such exemption is obtained posting of dividend warrants to non-resident shareholder amounts to a breach of the provisions of Section 9 (1) (a) of FERA.
Section 205(1) of the Act provides that “where after the commencement of the Companies (Amendment) Act 1974,
(a) a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 42 days from the date of declaration to any shareholders entitled to the payment of dividend, the Company shall within 7 days from the date of expiry of the said period of 42 days transfer the total amount of the dividend which remains unpaid or in relation to which no dividend warrant has been posted within the said period of 42 days to a special account to be opened by the Company.” Section 206 of the Act provides that dividend shall not be paid by a company in respect of any share except to the registered holders of such shares or to his order or to his bankers. Section 207 prescribes the penalty for failure to distribute dividend within 42 days from the date of declaration. Under the proviso to Section 207 no offence shall be deemed to be committed within the meaning of Section 207 in the following cases: -
(a) Where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given direction to the company regarding the payment of the dividend and these directions can not be complied with;
(c) where there is a disputer regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from shareholders; or
(e) where for any other reason failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default of the company. Section 205(5) (b) indicates the manner of payment of dividend; it provides that any dividend payable in cash may be paid by cheque or by warrant sent by post directed to the registered address of the shareholder entitled to the payment of dividend or in the case of the joint shareholders registered address of one of the shareholders. It was held by the Supreme Court in Hanuman Prasad Gupta vs. Haralal [AIR 1971(SC) 206] “that payment of dividend may be made either by paying in cash or by posting of the cheque or warrant and the obligation to pay is discharged when either step is taken.” Dividend however is payable only to the shareholder who has a right in law to receive payment of the dividend. Where the right of a shareholder to receive dividend is in dispute or where there is a lawful restriction imposed upon the right to receive dividend he will not be deemed a ‘shareholder entitled to the payment of the dividend’ within the meaning of Sections 205(5) (b), 205A(1) and 208(1) of the Act. It is implicit in the terms of the proviso to Section 207 that default in payment of dividend will be committed if the name of a person is registered as a shareholder in the Register of the Company and there is no obstruction arising by reason of any law to the payment of dividend to him. The Company is, because of Section 9 of FERA, unable to pay the amount in cash or to post the dividend warrant pursuant to the declaration of dividend at the Annual General Meeting. Under Section 205A the liability to transfer to the unpaid dividend account arises where dividend remains unpaid, that is, there is a shareholder who is entitled to receive payment of dividend and to that shareholder no warrant has been posted within 42 days of declaration of dividend. In our view, a ‘non-resident’ shareholder who because of the provisions of FERA is incompetent to receive the dividend except with the special permission of the Reserve Bank is not a shareholder entitled to receive payment of the dividend within the meaning of Section 205A of the Companies Act. Section 205A has been recently incorporated in the Act. The scheme of Sections 205, 206, and 207 as they stood prior to the amendment made by the Companies (Amendment) Act, 1974 clearly indicated that a default is committed by the Company if dividend is not distributed within 42 days of the declaration of dividend to a shareholder entitled to the payment of dividend. By the proviso to Section 207, in the five sets of circumstances specified, failure to pay will not be regarded as a default on the part of the company even if the dividend has not been paid in the manner provided by Section 205(5) (b). No offence will therefore be committed by the company if it is unable for reasons over which it has no control to pay the dividend or where the shareholder is, because of some law, not entitled to receive the dividend, e.g. where the shareholder is insolvent, or the shareholder being a company is ordered to be wound up, or the registered shareholder is dead and proceedings are pending for obtaining representation, or payment of dividend to a shareholder is in certain conditions prohibited. In our opinion, default in paying dividend will arise under Section 205A (1) and (2) only if the shareholder is entitled to receive payment of the dividend, and the Company declines or fails to make payment in the manner provided by Section 205(5)(b). In other words, if for any reason the shareholder is unable to receive payment of the dividend declared by the company, no liability would arise on the part of the company to transfer the amount to ‘unpaid dividend account’ until there is a shareholder who is entitled to receive the payment of the dividend and the company has failed or neglected to pay the amount of dividend or to post the dividend warrant to him. Where, by virtue of a statutory provision, the company is prohibited from posting the dividend warrant, in our opinion, the shareholders cannot be said to be entitled to the payment of dividend. The expression “remains unpaid” in sub-section (2) of Section 205A of the Act, in our view means dividend which can in law be paid but has not been paid on account of the default committed voluntarily. It does not envisage cases in which because of circumstances over which the company has no control the dividend cannot be paid. Since the dividend warrants were posted by the company to its shareholders within the statutory period, though the warrants require to be revalidated, no dividend remains “unpaid” within the meaning of sub-section (2) of Section 205A of the Act. Therefore, the dividend amounting to Rs. 15,744.43 which had remained unpaid at the commencement of the Companies (Amendment) Act, 1974, is not required to be transferred to the ‘Unpaid Dividend Account’. We suggest that the words “unpaid dividends” or “Unclaimed Dividends” should not be used in the Balance Sheet of the company and such items as represent dividends which have not been encashed should instead be described as ‘Dividend warrants issued but not encashed’. In order to strengthen the company’s case that it is not under an obligation to transfer any amount of dividend which remains unpaid to a special account on account of circumstances over which the company has no control, we would suggest that the company should incorporate an Article in the Company’s Articles of Association to the effect that a shareholder shall not be entitled to the payment of any dividend in any of the circumstances mentioned in the proviso to Section 207 of the Act and non-resident shareholders shall not be entitled to payment of any dividends until the approval of the Reserve Bank of India is given either generally or by a special order. We may state that we had an occasion to consult a senior Counsel on the subject and he has concurred with the views expressed in this letter. THE ABC CHAMBER OF COMMERCE &INDUSTRY
M/s. XYZ Ltd., 20th August, 1976
Dear Sir,
Interpretation of Unpaid Dividends under Section 205A of the Companies Act, 1956 We thank you for your letter Ref. P. 081 dated 8th July, 1976, together with a copy of the opinion tendered by C. & Co., in this connection. This matter was discussed in some detail at the last meeting of the Company Law and Industrial Affairs sub-committee of this Chamber. While the sub-committee fully appreciated the legal opinion, the consensus among the members was that, taking all factors into consideration, it would be prudent to follow the advice tendered, vide our letter dated 11th May, 1976, which was to the effect that dividends remaining unpaid regardless of whether dividend warrants had been posted or not, should be transferred and kept in a separate unpaid dividend account within seven days after the forty-second day of declaration of dividend. It would, however, be open to you to treat the ‘posting’ of the dividend warrants on the same basis as cheques posted in settlements of suppliers’ bills. This is to say that, as soon as dividend warrants have been posted the Company would be at liberty to pass an entry in its books of account which will have the effect of reducing the provision for dividends as also the bank balance of the company (the bank balance increases if the company has an overdraft) so that in effect posting of the dividend warrant is equated to payment by cheque. In that event the dividend warrants remaining unpaid, i.e., not presented to the company’s bankers for payment will figure as an item in the Company’s statement of reconciliation of its bank balance. A point we would emphasise, however, is that, should such an entry be passed in the books of accounts of the company it will be necessary to reverse the entry to the extent of the aggregate of dividend warrants not presented to the bankers but which have outlived their period of currency which may be three months or six months. When such reverse entry is passed the company will be under an obligation to transfer a corresponding amount to a separate bank account as an unpaid dividend account referred to earlier. The amount remaining unpaid out of such unpaid account three years from the date of the transfer would have to be remitted to Government in accordance with the provisions of Section 205A(5) We would reiterate that any article which empowers the company to forfeit dividends ‘unpaid’ and referred to in section 205A(5) of the Act would be bad in law and therefore void.
Yours faithfully Sd/- Secretary Opinion December 21, 1976 1. The query of the ABC Chamber of Commerce & Industry, as contained in its letter dated 20th August, 1976, relates to the question of “unpaid dividends” and Section 205A of the Companies Act, 1956. 2. The facts which have given rise to the query are that a company held its Annual General Meeting on 9th June, 1975, and declared a dividend in respect of the year ended 31st December, 1974. The dividend so declared had been paid to the Indian shareholders, but the dividend in relation to shares held by a non-resident shareholder remained to be paid for want of clearance under the Foreign Exchange Regulation Act, 1973. There was also an amount of Rs. 15,744.43 in the “unclaimed dividends account” as on 1st February, 1975, representing the dividends declared by the company in earlier years for which dividend warrants were posted, but which remained unencashed.
3. The points made out by the ABC Chamber of Commerce & Industry may be summarised as under: -
(i) The present accounting convention adopts different treatments for dealing with cheques issued and posted in payment of dividends and dividend warrants, although they are almost identical instruments. Whereas cheques are regarded as payment on issue, dividend warrants are regarded as payment only as and when actually encashed.
(ii) The difference in treatment is “none-too-logical”.
(iii) It is not proper to treat “dividend for which dividend warrants have been posted” as “unpaid”.
(iv) The Chamber has recommended that identical treatment should be given to “warrants” and “cheques” posted in payment of dividend.
(v) When the dividend warrants become “stale”, the payment entries should be reversed, and the obligations of “unpaid dividends” under Section 205A should be complied with. In this background, the Chamber has requested the Institute to issue such authoritative guidelines as may be considered appropriate. 4. The issue for consideration is whether the accounting treatment recommended by the Chamber in its letter of 20th August, 1976, is appropriate or not. The Committee is not called upon to express its views on the transfer of “unpaid dividends” to a separate bank account, and the requirements of Section 205A of the Companies Act. 5. It may be pointed out that the requirement under Section 205A(1) has now been clarified by the Department of Company Affairs in Cases where dividend warrants have been posted within the period of 42 days. It follows from this clarification of the Department of Company Affairs, vide Ref. Nos. 6/8/76-CL. 905 XIV and 8/30 (205a)/75-CL.V., dated 1st September, 1976, Circular No. 28/76, that irrespective of the accounting treatment of such dividend warrants, there is no obligation on a company to transfer the “unclaimed” or “unencashed” amount to a separate bank account. The controversy in that regard has, therefore, been set at rest. 6. There is, however, a separate requirement so far as sub-section (2) of Section 205A is concerned. This sub-section deals with amounts remaining unpaid as on 1st February, 1975, i.e., the date on which Section 205A came into force. The sub-section does not deal with the question of issue of dividend warrants. It is only concerned with the amount which remains “unpaid”. It would appear that the clarification of the Department of Company Affairs under sub-section (1) does not automatically resolve the issue involved in sub-section (2). 7. With regard to the question of non-remittance of dividends to non-resident shareholder pending clearance of the Reserve Bank under the Foreign Exchange Regulation Act, 1973, the Department of Company Affairs has recently clarified its view on this point, vide its Circular No. 8/30/(205-A)/75-CL.V dated 28-10-1976 which has been reproduced on page 141 of CICA Newsletter of December, 1976. The view of the Department does not accord with the opinion tendered by C & Co. It would follow from the Department’s view that in such cases the transfer to an “unpaid dividend” account cannot be avoided. In any event, the Expert Advisory Committee has not been asked to express its views on this issue. 8. The question for consideration is whether it would be appropriate to regard issue of “dividend warrants” as a payment at par with issue of “cheques”. As a strict accounting proposition, there can be no objection to issue of “dividend warrant” being equated with issue of “cheque” for the payment of dividend. As pointed out the Supreme Court in Hanuman Prasad Gupta, Vs. Hiralal [A.I.R. 1971 (SC), 206], a payment of dividend may be effected either in cash or by posting of a cheque or a dividend warrant, and the obligation to pay is then discharged. This view is also supported by Section 207 of the Act, which prescribes the penal consequences. Under Section 207, posting of “dividend warrant” is equated with “payment”. The same position follows from Section 205(5) (b) of the Act. 9. However, the accounting convention in regard to posting of “dividend warrants” has developed for certain special reasons. Wherever the number of shareholder is not large, Companies issue cheques in payment of dividends and do not open a separate banking account. However, where there are a large number of shareholder, for the sake of facility, Companies find it administratively desirable to open a separate dividend banking account, and to issue the dividend warrants on such account. Even here, Companies, in practice, do not transfer the entire dividend to the separate banking account on a single day, but arrange with the bank for transfer from the general account to the separate account, in convenient amounts as and when the warrants are presented for payments. The convenience sought to be derived by this exercise is to ascertain at any given point of time the amount of dividend warrants, which are unencashed without the necessity of a separate reconciliation account. From this point of view, it is only “paid”dividend warrants which are passed through the company’s books, till the end of the accounting year when the unpaid dividend will have to be accounted for and the balance in the separate banking account represents the aggregate unencashed dividends. This accounting treatment has been endorsed on pages 23260-61 of “Accountancy” by William Pickles, Fourth Edition. 10. The Committee, therefore, is of the view that the accounting convention of booking payment against dividend warrants, in a different manner from payments by cheques, has developed for the sake of accounting convenience and to obviate the need of a separate reconciliation statement. It is not as if such a convention is “none-too-logical”. The purpose of accounting is to reflect the transactions in the books and if the convention adopted assists the company in ascertaining the correct position, there is no need to deviate from that practice. In the opinion of the Committee, the accounting treatment adopted in the books does not, of its own, lead to a different result, on the construction of the provisions of Section 205 A of the Companies Act, 1956. __________________________ |