• CMI Legal

Directors Duty of Care When Declaring Dividends

Updated: Oct 12

Directors meet up annually to decide whether to pay the company’s shareholders dividends and if so, how much.

According to the recent decision in DSHE Holdings [2021] NSWSC 673 (‘DSHE Holdings’), there are requirements which individual directors must satisfy in order to declare a dividend.

Before its collapse in 2016, Dick Smith Holdings (‘DSH’) declared two dividends in 2015. An interim dividend of $16.555 million and a final dividend of $11.826 million were declared. Proceedings were brought against the directors of DHS for allegedly breaching their duty of care under Section 180 of the Corporations Act 2001.

Read more on a director's duty of care here:

Section 254T of the Corporations Act

Under Section 254T of the Corporations Act, a payment of dividend is prohibited unless:

"(a) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and

(b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors."

Section 254T does not impose an obligation on a director such that a breach of the provision does not automatically mean a breach of Section 180 duty of care. However, Justice Ball explained that directors do owe a duty to exercise reasonable care to prevent a company’s breach of the law. As such, directors are expected to be aware of Section 254T and must take reasonable steps to meet its requirements before declaring a dividend.

Reasonable Steps for Declaring a Dividend

Although Justice Ball found that there was no breach of Section 180 duty of care in DSH issuing its interim and final dividends, the case provides a a good guide for the steps required when declaring a dividend.

  1. Ensure that dividends are issued in accordance with the company constitution and/or dividend policy, if any;

  2. It remains question