This case illustrates that whether a dividend is mandatory depends on the true construction of the relevant provisions (in this case in the company’s constitution). Specifically, an entitlement to a percentage of the ‘profit of the company available for dividend purposes’ which applied “despite any provision in this constitution to the contrary” was construed to mean profit undiminished by the applications of discretions of the board under the constitution to declare dividends, capitalise profits, set aside reserves or provisions or carry forward profits. The case also illustrates that failure to pay a mandatory dividend may amount to oppressive conduct and that equitable rectification (to clarify the dividend rights) is not available for a constitution. Companies are reminded to exercise care when drafting the terms of mandatory dividend rights.
Sumiseki Materials Co Ltd (Sumiseki) held 25 million B class shares in Wambo Coal Pty Ltd (Wambo). Article 2.1B of Wambo’s constitution entitled B Class shareholders to receive a dividend in respect of every 6 month period of an amount equal to 25% of the ‘profit of the Company available for dividend purposes’ for that 6 month period based on the Interim Accounts for the period Article 9 also empowered the directors to declare dividends as ‘in their judgment, the financial position of the company justifies’ (Article 9.1), to capitalise profits (Article 9.2), to set aside out of the profits of the company such reserves or provisions ‘for such purposes as they think fit’ (Article 9.4) and to carry forward so much of the profits remaining ‘as they consider ought not to be distributed as dividends or capitalised’ without transferring those profits to a reserve or provision (Article 9.5). Sumiseki brought proceedings against Wambo in respect of its failure to pay dividends for five 6 month periods.
In finding for Sumiseki, the New South Wales Court of Appeal held that:
- whether distribution of profits is mandatory (in the sense that no separate decision to declare or pay is required and the company has no right to withhold) depends on the meaning and effect of relevant provision in the relevant constitution according to their true construction; and
- Article 2.1B provides that the dividend is ‘to be paid’ by a specified date and as such, on a proper construction, the constitution imposes on Wambo an obligation to pay it on each specified date for payment, regardless of any decision that it should be declared or paid.
The Court of Appeal also found that ‘profits available for dividend purposes’ refers to the net profit attributable to members undiminished by any application of the director’s discretionary powers in Article 9 (but subject to such diminution, if any, required by law). In so finding, the Court noted that:
- once it is recognised that Article 2.1B displaces the discretion of the directors under Article 9.1, it must likewise be recognised that Article 2.1B also displaces the powers that the directors could exercise under provisions allied with Article 9.1; and
- effect must be given to the opening words of Article 2.1B: ‘Despite any provision of this constitution to the contrary…’ which requires interpretation of the description ‘available for dividend purposes' in Article 9.1 in a way that is not affected by contrary indications elsewhere in the constitution.
In addition, the Court of Appeal:
- noted that despite the removal of the statutory rule in section 254T that dividends must not be paid except out of profits, there may remain a general law principle that dividends may only be paid out of profits, given the essential nature of a dividend as a “share of profits”;
- held that the decision of the Wambo directors not to pay the dividends and in some cases, to rely on contractual restraints as a means of unfairly bolstering the asserted ability of Wambo to deny dividends, was oppressive conduct within section 232 of the Corporations Act 2001 (Cth); and
- refused to rectify the Wambo constitution to clarify the dividend rights attaching to B class shares, noting that while equity may rectify an instrument that fails to record the true intention of the parties, it is by no means clear that a company’s constitution is an instrument.
See the case.