[Case Study] Consequences of default in depositing the declared dividend in a separate bank account

[2022] 143 taxmann.com 383 (Article)

1. Dividend a brief

Dividend means the portion of the profit received by the shareholders from the company’s net profit, which is legally available for distribution among the members. Therefore, a dividend is a return on the share capital subscribed for and paid to its shareholders by a company. The dividend is defined under section 2(35) of the Companies Act, 2013 and the dividend includes any interim dividend as well.

In case of the declaration final dividend, the board of directors makes the recommendation to the shareholders after the books of accounts are audited and the shareholders approve and declare the dividend recommended by the board of directors. In the case of interim dividend, the same is declared by the board of directors in between the two annual general meetings and it does not call for the approval of the shareholders and is paid to the members of the company as and when declared.

As and when the dividend is declared either a final dividend or interim dividend, the company needs to open a separate bank account titled as “dividend / interim dividend account with a scheduled bank and transfer the entire amount of dividend payable to this account within five days of declaration and give a copy of the board resolution containing instructions regarding the opening of the account and give the authority to bank to honour the dividend warrants when presented.

The company is required to ensure that the amount of dividend payable is transferred to a separate bank account within five days of the declaration of the dividend and the company does not commit any default in transferring the amount.

2. Relevant provisions of the Companies Act

The following are the relevant provisions under the Companies Act 2013 on this matter.
As per the provisions under the Companies Act 2013, section 123 (3) speaks about the declaration of the interim dividend by the board of directors along with the source from which the dividend could declare. Section 123 (4) of the Companies Act 2013 spells out that the amount of the dividend (final or interim) both are required to be deposited in a separate bank account within five days from the date of declaration of the dividend in a scheduled bank. The extracts of both sections are given below for the ready reference.

Section 123 (3):- The Board of Directors of a company may declare an interim dividend during any financial year or anytime during the period from the closure of the financial year till the holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profit generated in the financial year till the quarter preceding the date of declaration of the interim dividend.

Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, then such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

Section 123 (4):- The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend

3. Penal provisions for default/non-compliance

As per section 450 of the Companies Act 2013 (punishment where no specific penalty or punishment is provided) it says that if a company or any officer of a company or any other person contravenes any of the provisions of this Act and the rules made there under or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, director or exemption in relation to any matter has been accorded, given or granted and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person

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