Companies Act Section 127

Companies Act Section 127 - Punishment for Failure to Distribute Declared Dividends

Section 127 of the Companies Act, 2013, lays down the legal consequences and penalties for a company's failure to pay a declared dividend within the legally prescribed time frame. Declaring a dividend creates a binding obligation on the company to ensure the shareholders receive their entitled payment. If the company neglects or defaults in fulfilling this obligation, severe penalties are imposed on both the company and its directors who are responsible for the failure.

The section aims to protect shareholder rights by ensuring that once the company commits to distributing profits in the form of dividends, it follows through without undue delay or evasion.

Obligation to Pay Declared Dividends

When a company formally declares a dividend, whether at its Annual General Meeting (in the case of final dividends) or through a resolution of the Board of Directors (in the case of interim dividends), the company is required to ensure that:

The payment of the dividend is made to the shareholders who are entitled to receive it, and

This payment is made within thirty (30) days from the date the dividend is declared.

If the company fails to meet this requirement within the stipulated time period, it triggers penal consequences under this section.

Consequences of Failure to Pay Declared Dividend

If a company fails to pay the dividend or fails to post the dividend warrant/cheque within 30 days from the date of declaration, the following consequences arise:

1. Penalty on Directors

Every director of the company who is found to be knowingly responsible for or a party to the default shall face criminal and financial penalties.

Imprisonment: Such a director may face imprisonment for a term that may extend to two years.

Fine: In addition to imprisonment, the director will be liable to pay a fine of not less than ?1,000 for each day the default continues.

This personal liability ensures that directors cannot escape accountability by hiding behind the company’s corporate identity.

2. Penalty on the Company

In addition to penalising the directors, the company itself will also be financially penalized. The company will be liable to pay:

Simple Interest at the rate of 18% per annum for the period during which the default continues, calculated from the date the payment became due until the date the dividend is actually paid.

This high rate of interest acts as a deterrent and reflects the importance the law attaches to timely payment of dividends.

Exceptions- Circumstances When Failure is Not an Offence

However, the law recognises that in some situations, a company may be prevented from paying the dividend due to circumstances beyond its control. In such cases, the failure to pay will not be treated as an offence under Section 127.

The following are the legitimate defences available to a company under this section:

(a) Legal Prohibition

If the payment of dividend was legally prohibited due to the operation of any law (for example, a court order or regulatory restriction), then the non-payment would not be considered a default.

(b) Non-compliance with Shareholder’s Instructions

If a shareholder had given specific instructions to the company regarding how the dividend should be paid (such as requesting it be sent to a specific bank account), and the company was unable to comply with these directions provided the company duly communicated this inability to the shareholder such non-payment would not amount to an offence.

(c) Disputed Entitlement

If there is a dispute regarding who is entitled to receive the dividend (for example, competing claims to the same shares), the company is allowed to withhold payment until the dispute is resolved. This does not attract penalties under this section.

(d) Adjustment Against Debt

If the shareholder owes money to the company, the company is permitted to lawfully adjust the dividend amount against such outstanding dues. In such cases, the non-payment of dividend would not be considered a default.

(e) Other Justifiable Reasons

Finally, the law allows a general defence where the company can show that the failure to pay the dividend or post the warrant within the prescribed time was not due to any default on its part, but was caused by factors beyond its control. This could cover technical glitches, postal delays, or force majeure events, provided the company had taken all reasonable steps.