The payment of dividends : legal confusion, complexities and the need for comprehensive reform

Submissions have closed on exposure draft legislation intending to amend the
test for payment of dividends under s 254T of the Corporations Act 2001 (Cth).
Until 2010, a dividend could only be paid out of profits of a company. Since
then, the dividends provision has been repealed and replaced with a new
provision, which allows a company to pay dividends if it satisfies an “assets
greater than liabilities”, “fair and reasonable to shareholders” and “no material
prejudice to creditors” test. This article first examines why the profits test was
omitted from s 254T, before examining the current dividends provision,
identifying the shortcomings of the 2010 reforms and critically evaluating the
provisions proposed to replace the current s 254T. The article then considers
international developments, with a focus on New Zealand and a look at South
Africa, as examples of dividends tests in overseas jurisdictions, before
proposing how to address the current confusion and uncertainty. The article
concludes that the proposed amendments to s 254T will only partly address
existing problems. Thus, comprehensive reform in this area of the Australian
corporation’s law is recommended.