Case Summary: Cohen, NO v Segal 1970 (3) SA 702 (W)
Facts
Before
the liquidation of a company, the defendant and another (who were sole
directors and shareholders of the company) sold the fixed property of the
company and shared the proceeds as dividends.
Issue
Can
the directors of a company pay dividends out of capital?
Rules
Judicial precedent:
-
Boyd v Commissioner for Inland Revenue, 1951 (3) SA 525 (AD) F at
p. 534: A shareholder is not entitled to claim his aliquot share
of the profits made by the company unless a dividend is declared. Upon a
declaration of a dividend the sums due for dividend become debts due from the
company to the shareholders and the shareholders can sue the company for the
dividend; however -
-
As was pointed out in the case of Estate McGregor v de Beer's
Consolidated Mines, 20 S.C. 284 at p. 291, there may be special
circumstances in which a company might resist the payment of a dividend which
had been declared, and by way of illustration a reference is made to the case
where it is subsequently discovered that there was no profit to warrant the
declaration of the dividend
Legislation:
-
Secs. 6 & 44-50 of the Companies Act, 46 of 1926 (in summary): the
object of a limited company must be stated in the memorandum of association.
These objects cannot be enlarged by anything to be found in the articles of
association or by anything outside the memorandum. Share
capital is devoted to the company’s objects and members cannot be reimbursed
for their shares without the statutory conditions being complied with.
Analysis
It was stated that, in line with his fiduciary duty,
a director must at all times act in good faith with a view to the benefit of
his company. His basic goal should be the success of the company and the mutual
benefit of all shareholders without ulterior motives. Thus, it was stated that,
"whatever has been paid by a member cannot be returned to him and no part
of the corpus of the company can be returned to a member so as to take away
from the fund to which the creditors have a right to look as that out of which
they are to be paid. The capital may be spent or lost in carrying on the
business of the company, but it cannot be reduced except in the manner and with
the safeguards provided by the statute" (at 705H).
Having established the foregoing, the declaration of
the dividend was deemed ultra vires and
of no force and effect. Notwithstanding, the plaintiff’s case had to fail due
to a faulty cause of action (delict) because no pecuniary loss could be shown. This
is because no money was paid out of the company pursuant to the declaration of
the dividend.
The money had actually been paid out to the defendant as a loan and no claim had been made for the repayment of the loan.
Holding
The answer to the issue was held in the negative. A dividend may, generally
speaking, only be declared out of profits, and a resolution which declares
a dividend to be paid out of the capital of the company is ultra vires the
company.
It was held further, as the declaration of the
dividend was ultra vires and of no force and effect, and as
the money had been paid to the defendant as a loan, which loan still existed,
that the plaintiff had failed to make out a case for the payment of any money
on the cause of action relied on.
The court therefore made judgement for the defendant
with costs.
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