Companies Act Section 124

Companies Act, Section 124: Unpaid Dividend Account

Section 124 of the Companies Act establishes the legal framework for handling unpaid and unclaimed dividends. It ensures that companies properly manage dividends that remain uncollected by shareholders, preventing misuse or indefinite retention by the company.

This section mandates companies to transfer unclaimed dividends to a separate account, disclose details publicly, provide a mechanism for shareholders to claim their dues, and ultimately transfer unclaimed amounts to the Investor Education and Protection Fund (IEPF) after seven years.

Additionally, it prescribes penalties for non-compliance, ensuring that companies fulfill their obligations in a timely and transparent manner.

1. Transfer of Unpaid Dividends to a Separate Account

(a) Timeframe for Transfer

If a dividend has been declared by a company but remains unpaid or unclaimed for 30 days from the date of declaration, the company must act.

Within the next seven days after the 30-day period expires, the company is required to transfer the total unpaid or unclaimed dividend amount to a special bank account called the Unpaid Dividend Account.

This account must be opened in a scheduled bank and must be specifically designated for this purpose.

(b) Purpose of the Unpaid Dividend Account

This provision ensures accountability in handling unpaid dividends and prevents companies from holding such funds indefinitely.

It also allows shareholders additional time to claim their dividends while maintaining a clear record.

2. Disclosure of Unpaid Dividend Details

(a) Preparation of a Statement

Once the company transfers any unpaid dividend to the Unpaid Dividend Account, it must, within 90 days, prepare a statement containing:

1. The names of the shareholders entitled to the unpaid dividend.

2. Their last known addresses.

3. The amount of unpaid dividend due to each shareholder.

(b) Public Disclosure

The company must publish this statement on:

1. The company’s official website (if available).

2. Any other website approved by the Central Government.

This ensures transparency and easy access for shareholders to check whether they are entitled to any unclaimed dividend.

3. Penalty for Failure to Transfer Unpaid Dividends

(a) Interest on Delayed Transfers

If a company fails to transfer the unpaid dividend (or any part of it) to the Unpaid Dividend Account, it must pay interest at a rate of 12% per annum on the outstanding amount.

This interest accrues from the date of default and serves as an incentive for companies to comply on time.

(b) Benefit to Shareholders

The interest earned due to the company’s default will benefit the shareholders in proportion to the amount due to them.

This ensures that shareholders do not suffer a financial loss due to the company’s delay in transferring unpaid dividends.

4. Process for Claiming Unpaid Dividends

(a) Application to the Company

If a shareholder fails to claim their dividend within the initial 30-day period, they can still apply to the company to receive their unpaid amount.

The company is responsible for verifying the claim and processing the payment to the rightful shareholder.

This provision allows shareholders to reclaim their legally entitled dividends even after they have been transferred to the Unpaid Dividend Account.

5. Transfer of Unclaimed Dividend to the Investor Education and Protection Fund (IEPF)

(a) Seven-Year Rule for Unclaimed Dividends

If a dividend remains unclaimed for seven years from the date of its transfer to the Unpaid Dividend Account, it must be transferred to the Investor Education and Protection Fund (IEPF), established under Section 125 of the Companies Act.

Along with the principal amount, any interest accrued on the unpaid dividend must also be transferred.

(b) Reporting Requirement

The company must submit a prescribed statement containing details of the transferred funds to the authority managing the IEPF.

Once the transfer is completed, the IEPF authority will issue a receipt to the company as proof of compliance.

This provision ensures that long-unclaimed dividends are utilized for investor welfare and protection instead of remaining idle with companies.

6. Transfer of Shares to IEPF

(a) When Are Shares Transferred?

If a dividend remains unclaimed for seven consecutive years, the corresponding shares related to that dividend must also be transferred to the IEPF.

The company must submit a detailed statement of the transferred shares as prescribed.

(b) Right to Reclaim Shares

A shareholder (or legal heir) can reclaim their shares that have been transferred to the IEPF by following a prescribed procedure and submitting the required documents.

This provision ensures that rightful owners can recover their shares, preventing permanent loss.

(c) Exception to Share Transfer

If a dividend is claimed or paid at any time within the seven-year period, the associated shares will not be transferred to the IEPF.

This provision clarifies that active shareholders who periodically claim dividends will retain ownership of their shares.

7. Penalties for Non-Compliance

(a) Company’s Liability

If a company fails to comply with any of the requirements under Section 124, it is liable for a penalty of ?1,00,000 (one lakh rupees).

In the case of a continuing failure, the company will face an additional penalty of ?500 per day, up to a maximum of ?10,00,000 (ten lakh rupees).

(b) Directors’ and Officers’ Liability

Any officer of the company responsible for the failure is personally liable for a penalty of ?25,000 (twenty-five thousand rupees).

If the failure continues, the officer is subject to an additional penalty of ?100 per day, up to a maximum of ?2,00,000 (two lakh rupees).

These penalties serve as strong deterrents against negligence and ensure timely compliance with dividend-related obligations.

8. Key Takeaways and Significance of Section 124

(a) Protection of Shareholder Rights

Ensures shareholders receive their entitled dividends, even if they initially fail to claim them.

Provides multiple opportunities for shareholders to claim dividends before they are transferred to the IEPF.

(b) Prevention of Misuse by Companies

Prohibits companies from indefinitely holding unpaid dividends, ensuring funds are properly accounted for and transferred.

Mandates transparency by requiring companies to publish details of unpaid dividends.

(c) Investor Awareness and Protection

Unclaimed dividends and shares are transferred to the Investor Education and Protection Fund, which supports investor welfare initiatives.

Shareholders retain the right to reclaim transferred shares and dividends.

(d) Strict Compliance and Penalties

Companies and officers face significant financial penalties for failing to comply with Section 124.

Ensures that companies promptly transfer unpaid dividends and provide clear records to shareholders.