THE COMPANIES ORDINANCE, 1972

Profits and dividends

160.—(1) Dividends in respect of any class of shares of a company (other than interim dividends in respect of ordinary shares) may be declared only by an ordinary resolution passed at an annual general meeting :

Provided that if a company avails itself of section 141 of this Ordinance and does not hold an annual general meeting, the dividends recommended by the directors in the directors' annual report shall be deemed to have been declared by an ordinary resolution passed at an annual general meeting held on the day on which the company sends copies of its annual accounts and reports to its members and debenture holders in compliance with section 141(1), or if all the issued and outstanding shares of the company are represented by bearer share certificates, on the day on which it publishes an advertisement in compliance with section 141(3).

(2)  No provision in the memorandum or articles shall be valid by which a dividend is expressed to be payable at a specified time, or on the occurrence of a specified event, or on the ascertainment of the profits earned by the company for a specified period, without the declaration of a dividend by an annual general meeting.

(3)  An annual general meeting or an extraordinary general meeting may by ordinary resolution capitalise the whole or any part of the profits (including profits carried forward from previous financial years) or the whole or any part of the revenue reserves of a company, and, subject to the approval of any class of shareholders required by section 19, may provide for the application of the capitalised profits or reserves in any of the ways in which the capital reserves of a company may be applied by section 55(4) with the same consequences as if such an application were made.

(4)  Notwithstanding any provision in the memorandum or articles of a company, a general meeting may resolve to dispose of the profits or revenue reserves of the company in a way authorised by this section, even though the directors recommend that the disposal should not be made, or recommend that a different disposal should be made, or prohibit or refuse to permit the disposal, and any creation of revenue reserves or transfer of profits to revenue reserves by the directors shall be ineffective unless approved by an annual general meeting :

Provided that nothing in this section shall empower a general meeting to dispose of the profits or revenue reserves of the company in a manner which is inconsistent with cny contract which the company has entered into, or with an employee share subscription scheme to which the company is a party.

(5) In this Ordinance interim dividends mean dividends declared by directors between annual general meetings of a company under a power for that purpose contained in the memorandum or articles of the company, and revenue reserves mean the reserves of a company other than its capital reserve.

161.—(1) Dividends in respect of shares of a company and applications of profits and revenue reserves under section 160(3) may be declared or made only out of the profits (including profits carried forward from previous financial years) and the revenue reserves of the company as shown by the annual accounts of the company approved by an annual general meeting :

Provided that directors may declare an interim dividend in respect of ordinary shares out of the profits (including profits carried forward from previous financial years) and revenue reserves shown by the most recent annual accounts of the company and out of the profits which they estimate the company has earned since the date to which those annual accounts were made up, but before declaring an interim dividend the directors shall make provision for any loss which they estimate the company has incurred since that date.

(2) In calculating the profits of a company : —

(a) proper provision shall be made for the depreciation, diminution in value or obsolescence of its fixed assets (other than shares, debentures or other securities held by it);

(b)   proper provision shall be made for writing off bad debts, the unrecovered part of debts which have been only partially recovered or are only partially recoverable, and the expenses of forming the company and issuing its shares and debentures ;

(c)   the current assets of the company (other than cash, debts and liabilities owed to the company and shares, debentures and other securities held by it) shall be valued at their cost of acquisition, or the cost of acquiring the materials from which they are made, plus the cost of constructing, manufacturing or processing them, so far as such cost has been incurred, but such current assets shall in no case be valued at more than the amount which they may reasonably be expected to realise on a sale in the open market less the cost of completing them in order to make them marketable;

(d)   no appreciation in the value of the fixed or current assets of the company resulting from a revaluation shall be taken into account;

(e)   dividends or interest received by a company out of the profits of any of its subsidiaries for a financial year of the subsidiary whch ended before it became the company's subsidiary shall not be taken into account;

(f)    interest paid by the company shall be treated (so far as is possible) as having been paid out of the profits and revenue reserves ; and

(g)   reasonable provision shall be made for the company's contingent liabilities and for liabilities the amount of which cannot be ascertained with precision.

(3) Proper provision for the depreciation, diminution in value or obsolescence of a fixed asset shall be deemed to be made if either—

(a)   there is debited each year an amount equal to the quotient of the cost of acquisition, construction or development of the fixed asset (less its estimated disposal value at the end of its estimated useful life) and the number of the remaining years of its estimated useful life: or

(b)   there is debited each year a constant fraction of the cost of acquisition, construction or development of the fixed asset as diminished by provisions for depreciation, diminution in value or obsolescence of the asset made in previous financial years, so that at the end of the estimated useful life of the asset its written down value will equal its estimated disposal value ; end for the purpose of this subsection : —

(i) the estimated useful life of an asset means the number of years during which it was reasonably expected to assist the company to earn profits when it was acquired, constructed or developed ; and

(ii) the estimated disposal value of an asset means the amount reasonably estimated at that time as the price which it would realise on being sold in the open market at the end of its estimated useful life.

(4)  Current assets (other than cash, debts and liabilities owed to the company and shares, debentures and other securities) may be valued by applying any reasonable accounting method which avoids the need for ascertaining the cost of acquiring, constructing or processing individual items out of a stock of goods (whether constructed, manufactured or processed by the company or not) which are physically similar and are disposed of by the company at a substantially similar price at any given time.

(5)  It shall be permissible in valuing current assets of a kind which the company constructs, manufactures or processes to add to their value as ascertained under subsections (2) and (4) a reasonable proportion of the fixed overheads of the company which it reasonably expects to recoup out of the proceeds of disposal of the assets.

(6)  For purpose of declaring dividends (including interim dividends) or making any application of profits or revenue reserves under section 160(3), the profits and revenue reserves of a company shall be diminished by-

(a) any loss sustained by the company in any previous financial year (so far as not already written off out of profits or revenue reserves, or eliminated by a cancellation of paid up share capital or a reduction of capital reserve ; and

(b) any loss sustained by the company in a financial year subsequent to that in which the profits, or the profits transferred to revenue reserves, were earned :

Provided that it shall be permissible for a company to declare and pay the fixed dividend in respect of preference shares for a financial year if the company has earned profits in that year at least equal to the amount of the fixed dividend, and if the profits of the company for that year are less than the amount of the fixed dividend, the company may declare and pay a part of the fixed dividend amounting to not more than the profits earned in that year.

(7)  A company may declare a dividend out of the profit obtained on the realisation of a fixed asset only if : —

{a) any loss sustained on the sale of any other fixed asset in the same or a previous financial year has been written off out of profits or revenue reserves, or has been eliminated by a cancellation of paid up share capital or a reduction of capital reserve ; and

(b) the net worth of the company is not less than the sum of its paid up share capital and its capital reserve.

(8)  A consolidated profit and loss account of a holding company may not be used as the basis on which a dividend may be declared in respect of any of the shares of the holding company, nor as the basis on which profits of the holding company may be applied under section 160(3).

(9)  In this section the net worth of a company means the amount of its assets less the amount of its debts and liabilities, whether certain or contingent.

(10)  This section shall apply to profits earned and losses incurred by a company before or after the coming into force of this Ordinance and to revenue reserves created by the transfer of such profits.