Legal Insights
External Publications
Reforms To Rules On Dividend

Natalie Ooi explains the proposed new rules on dividends under the Companies Bill 2013

On 2 July 2013, the Companies Commissions of Malaysia ("CCM") released the exposure draft of the Companies Bill 2013 ("Bill") which is claimed will "revolutionise the way people do business in Malaysia". Among the many ground-breaking changes proposed under the Bill are the introduction of a no par value shares regime, the use of solvency statements for certain transactions, provisions for appointment of a judicial manager and, the subject of this article, the re-writing of the rules on dividend.


Section 365(1) of the Companies Act ("CA") provides that "No dividend shall be payable to the shareholders of any company except out of profits or pursuant to Section 60." Section 60 which permits dividends to be paid out of the share premium account through the issue of shares to members, falls outside the scope of this article.

Section 365(1) is in pari materia with Section 376(1) of the New South Wales Companies Act 1961. It also shares the same position as in the UK prior to the UK Companies Act 1980 and the New Zealand Companies Act 1955.


The CA and the corresponding legislation in the jurisdictions described above do not define 'profits'. Arising from this, the courts have, over the years, formulated various rules in relation to the payment of dividends on an ad hoc basis. These rules are summarised below.

  • Dividends may be paid out of trading profits for a financial year without any regard to the losses incurred in previous financial years (Re National Bank of Wales [1899] 2 Ch 629); and without first making good the lost capital (Lee v Neuchatel Asphalte Co [1889] 41 Ch D 1, Verner v General and Commercial Investment Trust [1894] 2 Ch 239 and Marra Developments Ltd v BW Rofe Pty Ltd [1977] 3 ACLR 185).
  • Dividends may be paid out of revenue profit without any regard to losses in fixed assets (Lee v Neuchatel Asphalte Co); or the need to make provision for depreciation of fixed assets (Ammonia Soda Co v Chamberlain [1918] 1 Ch D 266).
  • Dividends may be paid out of an unrealised capital gain resulting from a bona fide revaluation of fixed assets (Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch 353 and Industrial Equity Ltd v Blackburn [1978] 52 ALJR 89).
  • There is no necessity that there be available profits when the dividend is actually paid, so long as there were available profits when the dividend was declared (Marra Developments Ltd v BW Rofe Pty Ltd and BSN Commercial Bank (M) Bhd v River View Properties Sdn Bhd and another action [1996] 1 MLJ 872).


Since the inception of the CA, this is the first attempt by the CCM to reform the Malaysian corporate law which governs the distribution of dividends to shareholders. The proposed changes are embodied in Subdivision 6 (Clauses 130 to 132) of Division 1 of Part III of the Bill.

The new provisions lay down the requirements that have to be met before a dividend can be paid, and replace the rules summarised above, which have come to be viewed as 'commercially imprudent' and 'contrary to good accounting practice'.

Definition of 'profits'

Clause 130(2) of the Bill introduces a definition of 'profits' to clarify the dividend rules. The general rule under Clauses 130(1) and 130(2) of the Bill is that a company may only make a distribution to its shareholders out of the company's "profits available for the purpose", namely "its accumulated profits so far as not previously utilized by distribution or capitalization, less its accumulated losses, so far as not previously written off in a reduction or reorganization of capital duly made".

UK post-1980

Section 39 of the UK Companies Act 1980 and Section 830 of the UK Companies Act 2006 have a substantially similar definition of 'profits available for the purpose'; the only difference being that the UK Companies Acts include the words 'realised profits' and 'realised losses' which have been omitted from the Bill. The word 'realised' may have been inserted into the UK legislation to enhance the clarity of the provision.

David Kershaw in Company Law in Context: Text and Materials (2012), referred to the test as the 'accumulated profits test'. He further explained that "To determine whether, and the extent to which, a company can make a dividend, the company must first accumulate all its prior 'realised profits' and deduct from those profits any previous distributions that it has made or profits which it has capitalized. From this accumulated profit number the company must then deduct all its accumulated realised losses as adjusted to take account of any write-offs of its liabilities resulting from a capital reduction. If this accumulated realised profits figure exceeds the accumulated losses figure then the company may issue a dividend to the extent of the excess".

The operation of the 'accumulated profits test' can be illustrated as follows: In Year 1, ABC Sdn Bhd made a profit of RM100 and paid a dividend of RM80. In Year 2, it made a loss of RM200 and in Year 3, a profit of RM250. In the circumstances, ABC Sdn Bhd can pay a dividend of up to RM70 after Year 3 ((100 – 80) + 250 – 200 = 70).

The reason for introducing the above test is to prevent companies from relying on estimated or anticipated profits which might not materialise. This statutory requirement reverses the much criticised common law rule laid down in Dimbula Valley (Ceylon) Tea Co Ltd.

Furthermore, a plain reading of Clause 130 of the Bill suggests that a company can no longer distribute its trading profits for a financial year without having regard to the losses incurred in the previous financial years. In other words, past losses, both on operating losses and fixed assets, must be made good before any dividends can be paid. This abrogates the old common law rule, as noted above, which did not require losses incurred in previous accounting periods to be made good.

Hence, upon Clause 130 of the Bill becoming law, a company which is unable to satisfy the 'accumulated profits test' may have to undertake a capital reduction to eliminate its accumulated losses if it wishes to pay dividends to its shareholders.

The solvency test

Before authorising a dividend, the directors of a company are required under Clause 131(2) of the Bill to satisfy the 'solvency test'. A similar test has been applied in New Zealand since 1993.

The 'solvency test' proposed under Clause 131(2) read with Clause 131(3) of the Bill requires the directors to certify that "the company is able to pay its debts as and when they become due in the normal course of business" immediately after the distribution is made.

The introduction of the 'solvency test' means that the principle laid down in Marra Developments Ltd and BSN Commercial Bank (M) Bhd, which permits a dividend to be paid even if there are insufficient profits at the time of payment so long as there were available profits at the time when the dividend was declared, will not apply under the proposed new dividend regime in Malaysia.

New Zealand

Clause 131(1) of the Bill is similar to Section 52(1) of the New Zealand Companies Act 1993 ("NZ CA 1993"). Under the NZ CA 1993, the payment of a dividend is considered as a distribution, and a company is required to satisfy a solvency test before it can make a distribution to its shareholders. Gordon Williams in Corporations and Partnerships in New Zealand (2011) opined that "this solvency test requires a company to be able to pay its debts as they become due in the normal course of business and to possess assets greater in value than the value of its liabilities".

The NZ CA 1993 also requires the directors to issue a certificate of solvency before making a distribution. Michael Ross in his article Evaluating New Zealand's Companies Law (1994) expressed the view that "This requirement makes explicit what was an implicit obligation at common law". In the New Zealand Court of Appeal case of Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242, 249, Cooke J stated that:

"The duties of the directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance creditors are entitled to consideration ... if the company is insolvent, or near-insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency".

The NZ CA 1993 also provides that if, after a distribution is authorised and before it is made, the board of a company ceases to be satisfied on reasonable grounds that the company will, immediately after the distribution is made, satisfy the solvency test, any distribution made by the company is deemed not to have been authorised. On the other hand, Clause 131(4) of the Bill requires the directors to take all necessary steps to prevent the distribution being made. This appears to impose an additional requirement on the directors, and is unclear as to whether such dividends are also deemed not to have been authorised.


Initially, Section 254T of the Australian Corporations Act 2001 ("Australian CA") provided that dividends could only be paid out of profits and the rule was to be applied alongside a director's statutory duty to prevent insolvency.

However, Section 254T of the Australian CA was amended as from 28 June 2010 to replace the 'profits test' with an 'assets test', which requires a company to have assets in excess of its liabilities before a dividend is declared and that such excess must be sufficient for payment of the dividend.

Recently, it has been proposed in the exposure draft of the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 ("Australian 2014 Bill") that the 'assets test' in Section 254T of the Australian CA be replaced by an 'insolvency test'; a test which would be substantially similar to Clause 131 of the Bill.

As Section 52 of the NZ CA 1993 and the proposed new Clause 254T of the Australian 2014 Bill embody similar principles as the Bill, case law from New Zealand and Australia will be of assistance to the Malaysian courts in the interpretation of Clause 131 of the Bill upon it becoming law.


The introduction of a definition of 'profits' and the implementation of the solvency test under the Bill are much welcomed as they will enhance the dividend regime in Malaysia and afford greater protection to the creditors of a company.

Writer's e-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it



Natalie is an Associate in the Dispute Resolution Division of SKRINE. She graduated from University of Malaya in 2011.



IFLR 1000 2019 Rankings


IFLR 1000 2019 has ranked Skrine as a Tier 1 firm in four practice areas. In addition, eight of our lawyers were listed among the leading lawyers.


Asialaw Profiles 2019 Rankings


Asialaw Profiles 2019 has ranked Skrine as an ‘Outstanding’ firm in seven industry and practice areas. In addition, 10 of our lawyers were listed among the leading lawyers.


Benchmark Litigation Asia-Pacific 2018


We are pleased to announce that our firm is recognised as a Top Tier Firm in the inaugural Benchmark Litigation Asia-Pacific 2018. Some of our partners were also listed in the rankings.



English | Bahasa Malaysia