Changes to payment of company dividends

The formula by which companies can pay dividends to shareholders has changed with effect from 28 June 2010.

The recent Corporations Amendment (Corporations Reporting Reform) Act 2010 amends the provisions of the Corporations Act 2001(the Act) that deal with payment of dividends and changes the previous ‘profits test’ under section 254T of the Act to a new ‘solvency test’.

Previously, dividends could only be paid out of the profits of a company. This was designed to protect a company’s creditors by not allowing dividends to be paid out of the capital of the company. The standard calculation of when a profit had been made was by comparing the value assets of the business at two separate dates, usually a year apart.

For all dividends declared after 28 June 2010, the new ‘solvency test’ under section 254T of the Act applies, and a company must not pay a dividend unless:

• the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend;
  
  
• the payment of the dividend is fair and reasonable to the company’s shareholders as a whole;

• the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Assets and liabilities are to be calculated in accordance with accounting standards in force at the relevant time.

Essentially, the new section 254T allows for dividends to be paid other than out of the profits of the company, which will make it easier for some companies to pay a dividend. However, if a company is making a profit but has a deficiency in net assets, the company will not be able to pay a dividend.

Many company constitutions may state, in line with the old provision, that a dividend may only be paid out of the company’s profits. If this is the case, it will be necessary for the company’s constitution to be amended to remove any restrictions on the payment of dividends otherwise than out of profits, and to allow the directors to have discretion to determine the timing and amount of a dividend. This will allow companies to take full advantage of the increased flexibility of the new section 254T.

For more information please contact Penny Chalke, Associate in the Corporate and Commercial Services team on 8210 1260 or pchalke@normans.com.au.

When a deed is not a deed

400 George Street (Qld) Pty Limited & Ors v BG International Limited [2010] QSC 66

A recent Case in Queensland has re-examined what amounts to a deed and at what point in time a contract is formed. 

In this Case, British Gas intended to lease a number of floors at 400 George Street, Brisbane.  An agreement for lease was negotiated between British Gas and the landlords (collectively four companies). 

As is often usual practice, the landlords’ solicitor sent the finalised lease (with a letter of offer) to British Gas for signing.  British Gas signed the lease and returned it to the landlords’ solicitor.  However, it took several weeks for the lease to be circulated between the four landlords for signing.  Before British Gas had been informed that all of the parties had signed the lease, it decided to withdraw its offer to lease the premises.

The landlords brought proceedings seeking a declaration that British Gas was bound by the terms of the lease, because the letter of offer and lease document constituted an offer capable of immediate acceptance and further that the lease was a deed.

Whether the lease was a deed was significant, as once a deed is signed and delivered by one party to another, that party is immediately bound by the terms of the deed.

The Judge held that whether a document constituted a deed can only be discerned from the document as a whole, read in the context of the facts and actual or assumed knowledge of the parties.  A two part test was applied: was the deed written, and did the party signing and delivering the document intend it to be a deed?

The lease was found to be an agreement and not a deed for a number of reasons:

• the lease contained reciprocal obligations that clearly indicated that the lease was intended to operate as a contract;
  
  
• the language of the agreement was inconsistent with it being a deed.  The agreement used the term “Background” instead of “Recitals” and on the cover page stated that it was an agreement.  It also referred to the operative part of the agreement as being “in consideration of, among other things, the mutual promises contained in this agreement” – a deed does not require consideration for it to be binding;
  
  
• there was no communication between the parties that the lease was intended to be executed as a deed;
  
  
• many obligations under the agreement were contingent on the date of the agreement being identified in the document.  British Gas if not dated the agreement when it signed and on that basis, was held that it could not have intended for the document to be a deed and immediately binding, as the agreement was contingent on the date being inserted at a later time by another party.

This was despite the execution clause stating “executed as a deed”. It was held that the execution clause did not represent the true intention of the parties. 

This emphasises that when a document is to be signed as a deed the language needs to be consistent with that usually associated with deeds, and will need to be worded carefully to ensure that the true intention of the parties is set out in the document.

For more information please contact Penny Chalke, Associate in the Corporate and Commercial Services team on 8210 1260 or pchalke@normans.com.au.

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