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 Since then, the dividends provision has been repealed and replaced with a new provision, which allows a company to pay dividends if it satisfies an “assets greater than liabilities”, “fair and reasonable to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.