While this case concerned the previous ‘profits’ test for dividends (which has now been replaced with a ‘solvency’ test), it provides some useful guidance on the obligations of directors to consider financial information in deciding whether to declare a dividend.  In particular, the Supreme Court of Victoria considered the nature of management reports (as opposed to statutory financial reports) and emphasised the dangers of directors relying on management reports as a basis for sufficient financial comfort to declare a dividend, particularly where there are financial and other issues which may mean that the company is likely to face accounting adjustments in its statutory financial reports.

In 2004, San Miguel Corporation (SM) purchased a 50% interest in Berri Limited (Berri) from ICM Investments (ICM), with the remaining interest to be acquired by SM pursuant to a Put and Call Option Deed (Deed).  In November 2005, ICM exercised the put option and SM acquired ICM’s remaining shares in Berri shares on 28 December 2005.  Under clause 7.7(a) of the Deed, ICM was entitled, upon exercise of the put option, to be paid all dividends for the period between the last dividend declared and paid by Berri and the acquisition by SM of ICM’s remaining shares in Berri.  However, no such dividend was paid and ICM sued both Berri and SM.

His Honour found that both Berri and SM were in breach of clause 7.7(a) by failing to convene a meeting of the Berri board for the purpose of considering the declaration and payment of the dividend to ICM. The question was then whether the breach caused ICM loss, that is, whether but for the failure to convene the board meeting ICM would have been paid the dividend. 

At the time, section 254T of the Corporations Act 2001 (Cth) still provided that a company could only pay dividends out of profits (a test which has now been replaced with a solvency test).  Nonetheless, in finding that the directors would not have been able to satisfy the test in Marra Developments Ltd v Rofe Pty Ltd[1977] 2 NSWLR 616 (ie that the directors must form a “genuine opinion” that there were sufficient profits out of which the dividend could be paid), Vickery J made the following observations and findings which still provide some useful guidance on the obligations of directors to carefully consider financial information prior to paying a dividend:

  • at the relevant time, Berri had produced management reports but not yet final audited financial statements;
  • given the Marra test in to be applied in this case, reliance on management reports needed to be approached with caution;
  • as observed by Austin J in ASIC v Rich [2009] NSWSC 1229, management reports are not externally reported and are forward looking and often pragmatically prepared as opposed to audited financial statements which are based on past information and externally reported; and
  • the unique and challenging financial context in which Berri was operating, and the number and nature of unusual accounting adjustments facing it in late 2005 required further caution.

See the case.