Question

You have been appointed as the accountant for a small proprietary limited company ‘Midnight Soil Pty Ltd’ (The Soils). The ‘Soils’ conducts tests to see if soil is contaminated and whether (or not) that land can be used for approved purposes (or not). The Soils has five directors. They have all agreed that at their next board meeting they would discuss paying a dividend of 22 cents per share. However, you have identified there is a potential cash flow issue due to the company’s recent loss of a major contract. You have assessed that the company is able to cover this revenue loss in the short term because it has a positive net asset position carried over from the previous financial year. Your further opinion is that cash flow problems will arise during the next quarter and you have put this in writing to the Soils Board. Based on your advice, two directors call you before the next board meeting to ask if there is anything that can stop the proposed dividend if three of the five directors vote in favour of paying the dividend now. Advise the two directors. Use relevant cases and legislation to support your answer.

Answer 1

Data Page Layout Fprmulas Home Insert Cut E AutoSum 11 Wrap Text Calibri General ECopy Conditional Format Formatting as Table Styles E Merge & Center $ % 4 Insert Delete Format Paste Cell BIU 3 Format Painter 2 Clear Clipboatd Aligniment Font Styles Number Cels D19 A H F G M K R 1 The followings points need to be kept in mind: 2 3 The dividend, be it Interim or Final, once declared cannot be revoked. 4 Final dividend is proposed by the Board of Directors(BOD) and it is approved by the Members in the Annual General meeting. *The BOD has a right not to propose any dividend if it si of the opinion that paying dividend is not fruitful. *The BOD also has a right that once dividend is proposed, it may be revoked if paying dividend is not beneficial to cash flow position of the company. 5 6 7 From the above, it can be concluded that since the company has faced major contract loss which is going to affect the financial position of the company it has a right 10 not to propose any dividend. Also, the company is of the opinion that such loss can be recovered in short term period which means it can declare dividend next year but declaring dividend in current year would not be benficial to the company. Also, it has been told that the company may face loss in the next quarter due to such condition. Every point that has been noted, leads us to believe that dividend declaration is not in favour of the company. 11 12 13 14 16 Out of 5 directors, three are of the opinion that dividend should be declared. It should be explained to them that dividend declaration is not in favour of the company However, even after that if dividend is proposed then representation should be made at AGM to Shareholders that dividend declaration is not in favour of the financial position of the company. Such dividend can be then revoked before it is approved by the shareholders. 17 18 19 The two directors should quote as per Law, that when dividend declaration is not beneficial to financial position of the company such dividend declaration 23 should not be proposed. Also, there is not provision in law justifying that dividend should be declared every year. The moment company survives this setback due to contract loss it can 22 23 24 declare dividend next year to make up for the loss. This condition should be brought to the notice of Directors as well as Shareholders, that if dividend is declared and company is not able to pay such dividend then it will lead to Penalty. Moreover, it maye lead to company facing more loss ahead and even worse may go in Insolvency/bankruptcy. 25 ... 26 27 4 Ans 1 Ans 2 Ans 4 Ready Ans 5