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  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: https://www.cmigroup.com.au/post/ranking-law-schools-by-judicial-success.
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.
Ensure that dividends are issued in accordance with the company constitution and/or dividend policy, if any;
It remains question