Compliant dividend distribution can protect your company and shareholders. Here’s how to get it right under Section 60 of the Companies Act.
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💼 What Is a Dividend?
A dividend is a payment made by a company to its shareholders, typically out of the profits it earns. It represents a return on investment for those who own shares in the business.
Under Section 60(1) of the Companies Act, No. 07 of 2007 (Sri Lanka):
A dividend is defined as a distribution of profits, but does not include:
- The company redeeming its own shares
- The company buying back its shares from shareholders
So, only profit distributions—not repayments or redemptions—are legally classified as dividends.
⚖️ Equal Rights: Treating Shareholders Fairly
One of the key principles in corporate law is equality among shareholders of the same class. Section 60(2) reinforces this:
🎯 All shareholders of the same class must be treated equally when receiving dividends.
For instance, if two people hold ordinary shares, they must receive the same dividend per share—unless specific legal exceptions apply.
🔍 Two Legal Exceptions to Unequal Dividend Payments
While fairness is the default, there are two legal exceptions that allow the board to pay different dividend amounts to shareholders of the same class:
1️⃣ When Shares Are Not Fully Paid
If a shareholder hasn’t fully paid for their shares (i.e., there’s an unpaid liability on the shares), their dividend can be reduced proportionally.
Example:
| Shareholder | Shares Held | Paid Per Share | Dividend Per Share | Total Dividend |
|---|---|---|---|---|
| A (Fully Paid) | 100 | Rs. 100 | Rs. 10 | Rs. 1,000 |
| B (Partly Paid) | 100 | Rs. 50 | Rs. 5 | Rs. 500 |
This prevents unfair advantages for shareholders who haven’t fully invested.
2️⃣ When a Shareholder Voluntarily Waives Their Dividend
A shareholder can voluntarily agree in writing to receive:
- No dividend, or
- A reduced dividend.
This can be strategic—for example, a director-shareholder may choose to waive dividends to reinvest in the business.
⚠️ Important: This agreement must be in writing. Verbal agreements won’t hold up legally.
📌 Why This Law Matters
Section 60 ensures:
- Fair treatment for all investors,
- Accountability in profit distribution,
- Transparency in board decisions.
It also prevents directors from giving preferential treatment to certain shareholders, which is a common source of disputes in private or family-owned companies.
✅ Best Practices for Business Owners & Directors
| Task | Why It’s Important |
|---|---|
| ✅ Use profits only for dividends | Avoid illegal distributions |
| ✅ Apply solvency test before declaring dividends | Protects company & creditors |
| ✅ Treat same-class shareholders equally | Ensures legal compliance |
| ✅ Reduce dividends only when legally justified | Avoids penalties and shareholder conflict |
| ✅ Record written waiver agreements | Required by law |
📬 Final Thoughts
Dividends can be a powerful tool to reward shareholders—but they must be handled legally and transparently. If you’re unsure whether your company is distributing dividends correctly:
- Review your Articles of Association
- Ensure all shares are classified properly
- Seek guidance from a company secretary, accountant, or corporate lawyer
🧾 Want Help?
Need a dividend declaration resolution template, or guidance on applying the solvency test before payouts?
📩 Contact us today and ensure your business stays compliant while keeping shareholders happy.
