When your company earns profits, you might want to reward shareholders with a distribution—often in the form of dividends. But under Sri Lankan law, there are strict conditions that must be met before doing this.

Let’s walk through what Section 56 of the Companies Act says, and what it means in real life.


📘 What Is a “Distribution”?

In simple terms, a distribution is any payment or benefit given by a company to its shareholders. This includes:

  • 💰 Dividends
  • 🎁 Bonus shares
  • 💸 Repayment of capital
  • 📉 Share buybacks

✅ When Can a Company Make a Distribution?

Before a company distributes anything to its shareholders, two legal steps are required:

1. 📋 Board Authorisation

The Board of Directors must:

  • Officially approve the distribution,
  • Decide the amount and timing, and
  • Sign a certificate stating that, in their opinion, the company will remain solvent after the distribution.

2. 🗳 Shareholder Approval (Optional)

Unless your Articles of Association say otherwise, shareholders must approve the distribution by an ordinary resolution (simple majority).


🧪 What Is the Solvency Test?

The solvency test means the company must be able to:

  1. 🧾 Pay its debts as they fall due, and
  2. 💼 Have assets greater than liabilities (including any preferential rights on shares).

🎓 Preferential returns must be included in “debts” when applying the test—unless the company’s rules allow the board to skip or defer those payments.

📑 Auditors Must Certify Solvency

The auditors must issue a solvency certificate confirming the board’s judgment. This adds a layer of financial responsibility and credibility.


⚠️ Penalties for Directors

If a director authorizes a distribution without following these steps, they can be:

  • Found guilty of an offence, and
  • Fined up to Rs. 200,000 upon conviction.

So, skipping the solvency test or issuing dividends without proper documentation isn’t just risky—it’s illegal.


📊 Real-Life Example

👩‍💼 Meet Nisha — Owner of “Ceylon Spice Exporters (Pvt) Ltd”

Nisha’s business had a good year. Her company earned a net profit of Rs. 5 million. She and the other shareholders are eager to declare a dividend of Rs. 2 million.

Here’s how Nisha proceeds legally and responsibly:


✅ Step-by-Step Breakdown:

  1. Board Meeting Held
    • Directors propose a Rs. 2 million dividend.
    • They check the company’s balance sheet and cash flow.
  2. Solvency Test Conducted
    • Assets: Rs. 15 million
    • Liabilities (including preferential returns): Rs. 8 million
    • Cash in bank: Rs. 3 million (enough to pay the dividend)
    • No overdue debts
      ✔ Result: The company passes the solvency test.
  3. Auditor Issues Certificate of Solvency
    • External auditors review the company’s financials and confirm solvency.
  4. Directors Sign Solvency Declaration
    • Each director signs a formal certificate stating their belief that the company will remain solvent.
  5. Shareholder Resolution Passed
    • Shareholders vote on the dividend. It passes by majority.
  6. Dividend Paid Legally

📬 Final Thoughts

Issuing distributions is a great way to reward shareholders—but it must be done legally and responsibly.

✅ Always:

  • Follow the solvency test,
  • Involve your board and auditors,
  • Keep formal records and resolutions, and
  • Ensure distributions are within your financial capacity.

👩‍⚖️ Need Help?

If you’re unsure whether your company qualifies to make a distribution—or need templates for board resolutions and solvency certificates—speak to a:

  • Chartered Accountant 🧾
  • Corporate Lawyer ⚖️
  • Company Secretary 🗂️
Tags: