Updating Company Constitutions
For those of you who have clients with companies operating in their own right, the changes to Section 254T of the Corporations Act 2001 have an immediate impact.
The changes are such that the existence of profits is no longer relevant to whether a company can pay a dividend. Instead, there are now three matters that directors are to consider which must be answered positively before a dividend can be paid.
Dividends can only be paid where:
- The Company's assets exceed its liabilities before the dividend is declared and the excess is sufficient for the payment of the dividend; and
- The payment of the dividend is fair and reasonable to the holders of shares in the Company as a whole; and
- The payment of the dividend does not materially prejudice the Company's ability to pay its creditors.
Most, if not all, Constitutions provide that dividends can only be paid out of profits. These Constitutions should be amended to reflect the current law, as the change to Section 254T occurred on 1 July 2010. Companies that do not amend will have 2 layers of requirements to comply with.
The LRC® update will work for most "Pty Ltd" companies, regardless of who is the original author of the Constitution.
It is now no longer acceptable for Constitutions to state that dividends can only be paid out of profits. It is critical that steps be taken sooner rather than later to undertake the update of Constitutions.
If you have any questions please contact Lauren Biermann on 07 3230 5222 or 1300 363 401.
