Companies Act Section 51

Companies Act – Section 51: Payment of Dividends in Proportion to Paid-Up Share Capital

1. Overview and Applicability  

Section 51 of the Companies Act governs the payment of dividends by companies, specifically when dividends are distributed in proportion to the amount paid-up on each share. 

This provision introduces an important flexibility, allowing companies to calculate dividend payouts based not just on the nominal or face value of shares but in accordance with the actual amount paid towards the share capital by the shareholders. 

However, the implementation of this rule depends on specific authorisation in the company’s Articles of Association. 

2. Requirement for Authorisation in Articles of Association  

The ability of a company to pay dividends in proportion to the paid-up capital is not automatic. It can only do so if explicitly permitted by the company’s Articles of Association. 

The articles serve as the primary governing document for the company’s internal operations, including rules on how dividends will be determined and distributed. 

If the articles contain no such authorisation, the company must follow the standard rule of equal dividend distribution based on the nominal value of shares, irrespective of how much capital has been paid-up by shareholders.

3. Meaning of Dividends Paid in Proportion to Paid-Up Capital  

Ordinarily, dividends are declared and distributed equally on a per-share basis, regardless of whether all shareholders have fully paid their subscribed share capital. Section 51 introduces an alternative approach, where dividends are calculated in proportion to the amount of share capital paid-up by each shareholder. This means:

If some shareholders have only partially paid the amount due on their shares, their dividend entitlement will be adjusted based on the amount they have contributed.  

Shareholders who have fully paid up their shares will receive a higher share of the dividend compared to those who have only partially paid the subscribed capital.  

Example:  

Suppose a company has declared a dividend of 10% on shares.  

If a shareholder has paid up the full nominal value of ?100 per share, they will receive ?10 per share as a dividend (10% of ?100).  

If another shareholder has only paid ?50 on a share with the same nominal value of ?100, they will receive only ?5 as dividend (10% of ?50).  

This proportional distribution ensures fairness by aligning dividend payouts with the actual financial commitment made by shareholders.

4. Importance of Proportional Dividend Payments  

This method of proportional dividend payments serves several purposes:  

Fairness: Shareholders are rewarded based on their financial contribution, ensuring that those who have fully paid their dues benefit accordingly.  

Incentive for Timely Payments: It encourages shareholders to pay their outstanding capital to benefit from higher dividend payouts.  

Flexibility for Companies: The company can better align its dividend policy with the structure of its share capital and shareholder contributions.

5. Impact on Dividend Policy  

If a company adopts this proportional approach, it must:

Clearly disclose the rules for calculating dividends based on paid-up capital to ensure transparency among shareholders.  

Document the procedure for proportional payments in its articles or dividend policy.  

Monitor shareholder payments to accurately determine the dividend entitlement of each member.