THE COMPANIES Act, 2004 (Act) became effective on February 1, 2005. The seventh schedule of the act requires the accounts of companies, except small companies or small groups as defined by the act, to be prepared in accordance with generally-accepted accounting principles promulgated by the Institute of Chartered Accountants of Jamaica (ICAJ), from time to time, or such other body as the minister may prescribe. ICAJ has adopted International Accounting Standards (now International Financial Reporting Standards (IFRS)).
A company's ability to declare dividends depends on the distributable profits available, as well as restrictions imposed by the act and any other legislation. The Banking Act and the Financial Institutions Act state that no dividend should be paid on licensee's shares:
(i) "Until all its capitalised, expenditure not represented by tangible assets and all prior losses have been completely written off, so that the minister may by order, provide that, subject to such terms, conditions, exceptions, and restrictions (if any) as he may specify therein, such expenditure shall be deemed not to include expenditure for the purchase of goodwill.
(ii) If the paid-up capital or cumulative balance in the reserve fund has been impaired, until such impairment has been corrected.
(iii) If having regard to the bank's liabilities, it would be imprudent to do so.
(iv) Until the requirements of this act relating to reserves have been met.
(v) Until all sums due and payable to the Bank of Jamaica by the bank have been paid."
Section 158 of the Companies Act stipulates that a company may, in general meeting, declare dividends in respect of any year or other period. No dividends shall be payable to the shareholders of a company except out of profits. A company shall not declare or pay a dividend if there are reasonable grounds for believing that:
(a) The company is, or would be after the payment, unable to pay its liabilities as they become due.
(b) The realisable value of the company's assets would be thereby less than the aggregate of its liabilities and stated capital.
The new act now seems to require a general meeting for the declaration of dividends. Interim dividends declared by the directors may have to be reviewed and the required practical action taken to comply with the act. Areas to be considered would be whether a resolution should be passed at the annual general meeting to ratify interim dividends declared or authorise the directors to declare interim dividends or adopt the new Table A (which does not follow the new act as it is the old Companies Act- Table A). Legal advice may be required to determine the practical application of Section 158, in relation to Sections 354 and 396 of the act, the old articles of association and Table A.
Distributable profits may be adversely affected by IFRS, e.g. defined benefit pension scheme deficits, provision for other employee benefits such as health insurance and outstanding leave, increased deferred tax liabilities, accounting for investments and non-distributable surplus e.g. defined benefit pension scheme surplus.
Mr. Raphael E. Gordon is the Managing Partner of KPMG Peat Marwick, Chairman of KPMG CARICOM, Past President of the Institute of Chartered Accountants of Jamaica, a member of the Public Accountancy Board, and a former Jamaica's representative on the Association of Chartered Certified Accountants International Assembly. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG Peat Marwick. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
