The payment of dividends : legal confusion, complexities and the need for comprehensive reform

Submissions have closed on exposure draft legislation intending to amend thetest 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. Sincethen, the dividends provision has been repealed and replaced with a newprovision, which allows a company to pay dividends if it satisfies an “assetsgreater than liabilities”, “fair and reasonable to shareholders” and “no materialprejudice to creditors” test. This article first examines why the profits test wasomitted from s 254T, before examining the current dividends provision,identifying the shortcomings of the 2010 reforms and critically evaluating theprovisions proposed to replace the current s 254T. The article then considersinternational developments, with a focus on New Zealand and a look at SouthAfrica, as examples of dividends tests in overseas jurisdictions, beforeproposing how to address the current confusion and uncertainty. The articleconcludes that the proposed amendments to s 254T will only partly addressexisting problems. Thus, comprehensive reform in this area of the Australiancorporation’s law is recommended.