Distribution of Dividends by Cyprus Companies
Co-authored by: Omiros Klappis and Fanis Onisiforou SCORDIS, PAPAPETROU & Co
This article discusses the main legal principles applicable to the distribution of dividends by Cyprus private and public companies.
The Cyprus Companies Law, Cap 113 (the “Companies Law”) does not directly regulate the general rights of shareholders of private companies with reference to dividends and the way dividends are to be declared and paid to shareholders.
Matters pertaining to the declaration of dividends by private companies are regulated by: (i) common-law principles, and (ii) the provisions of a company’s articles of association, always to the extent that latter are compatible with applicable legal principles.
Generally, pursuant to the model articles set out in Table A of the Companies Law, a company can declare and distribute interim and final dividends. While interim dividends are declared and approved by the board of directors out of the profits of the company, final dividends are declared at general meetings and no final dividend shall exceed the amount recommended by the directors.
The above limitations set out in Table A constitute a re-affirmation of the common law principle that, in the light of the maintenance of capital rule, there can be no distribution of dividends out of capital or that dividends must only be paid out of profits.
In particular, the applicable common-law principles inter alia provide that, the distribution of a dividend is an internal arrangement of the company, and if it is done honestly and does not violate any of the provisions of the company’s articles of association, the courts will be reluctant to interfere with the discretion exercised by the directors or with the powers exercised by the company in general meeting, within its articles of association. Yet, the directors must in all cases act in the best interests of the company and in any event, dividends cannot be paid if this would result in the company being unable to pay its debts as they fall due. The latter overriding condition of solvency supersedes all the other rules governing this area of law.
The term “profits” or the term “profits available for dividend” is not defined under the Companies Law. Guidance can therefore be drawn from English case law. Even though the principles as set out in the English judicial precedents on this matter are now abrogated in the United Kingdom and that the distribution of “profits” is governed by the relevant statutory provisions of the applicable English Law, the Cyprus courts have adopted the English common-law principles.
Pursuant to the said English case law “profits” is essentially a business term, denoting an amount of gain made during a certain period and the term “profits available for dividend” has been held to mean the profits which the directors consider could be distributed to the shareholders after making provisions for reserves or for other purposes.
Directors may declare or propose a distribution of dividend out of profits available for dividend including profits which are in a (positive) reserve fund formed out of profits retained or out of profits which have been carried forward without being placed in reserve, provided that the directors are acting in good faith and are taking into account that the company would still be able to pay its debts.
An area of controversy and discussion in determining “profits available for distribution” is whether a private company, being in a net liabilities position (negative equity), is prohibited under Cyprus Law to make a distribution of a final dividend out of the trading profits of a financial year.
Although English judicial precedents suggest that losses made by private companies in previous accounting periods need not to be made good and a dividend can be paid in a financial year provided there is a profit available for dividend on the financial year’s trading, it is unclear whether undistributed profits of past years remain profits that can be distributed in future years in circumstances where the company is in a net liabilities position (negative equity) and such profits have been taken to a negative reserve in order to make good of losses incurred in previous years.
The law in relation to public companies is completely different since under section 169A of the Companies Law, a public company cannot1 make distributions to its shareholders, when, on the closing date of the last financial year, the net assets, as already presented in its annual accounts, or as could arise as a result of such distribution, are below the total of the subscribed capital and the reserves, the distribution of which the law or the articles do not allow. The amount of a distribution to shareholders cannot exceed the amount of the results of the last financial year, increased by the profits brought forward at the end of the last financial year and sums drawn from reserves available for this purpose, reduced however by the amount of losses brought forward from previous financial years, and sums placed to reserve in accordance with the law or the articles of association.
Directors who are parties to the payment of a dividend out of capital, except as authorised by the relevant provisions of the Companies Law, are prima facie jointly and severally liable to repay the amount. Furthermore, shareholders who have, with full knowledge of the facts, received dividends paid out of capital may be liable for improper distributions. More generally, it shall be noted that under insolvency law, the general principle is that from the moment the company is unable to pay its debts as they fall due, the directors’ duties shift towards protecting the interests of the company’s creditors rather than promoting the interest of the shareholders. In this respect, in case the company becomes insolvent, directly or indirectly, due to an unlawful declaration and payment of dividend, the directors may be liable towards the company and its creditors by virtue of applicable insolvency principles. Our team of lawyers and consultants is at your disposal for advising on relevant matters.
The information contained herein constitutes a general outline and discussion of its subject matter and is published for the purpose of providing a general understanding of the law, not to provide a comprehensive study or specific legal advice. This article should not be treated as a substitute for specific advice concerning individual situations. Each relevant case shall be considered by reference to its specific circumstances and separate legal advice should be sought for specific cases. By reading this article you understand that there is no attorney client relationship between you and SCORDIS, PAPAPETROU & Co.
1 Except for cases of reduction of subscribed capital