Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).

Generally, companies are formed to make profits for its members. No express power is required in its constitution to distribute profits to its members. There is also no rule that all profits must be distributed. A payment of profits of a company to its members is called a dividend. A dividend is a share of profits in a company, i.e. a distribution of a company’s net profits which are payable to shareholders in the proportion to their shareholdings, which may be at a fixed date or otherwise declared in the manner provided by the company’s constitution.

1. Conditions for Dividend Payment
   
   A company may only make a distribution of profits to its shareholders if the company is solvent. The company is regarded as solvent if it is able to pay its debts as and when the debts become due within 12 months immediately after the distribution is made.
   
   If after a distribution is authorised but before the payment is made, the company ceases to be solvent, the directors must take necessary steps to prevent the distribution from being made.
   
   A company may recover the amount of distribution received by a shareholder which exceeds the amount which could properly have been made, unless the shareholder has received the distribution in good faith without knowledge that the company failed to meet the solvency test.
   
   
2. Power to Declare Dividends
   
   Payment of a dividend involves two steps, first it must be declared by a competent authority to be followed by the payment of money in satisfaction of the dividend declared.
   
   For companies with a constitution, the competent authority for the interim dividend is the board and in the case of final dividend, the competent authority is the shareholders. For companies without a constitution, payment of dividends is to be approved by the board regardless of the type of dividends to be declared.
   
   
3. Procedure for Dividend Payment
   
   It is quite simple for a company with a handful of shareholders to make payment of dividends. The procedure for payment of dividend is as follows:
   

   (1)	Check if the company (not at group’s level) has sufficient profits to declare the dividend and ensure adequate balance in the bank account for the payment of the dividend.
   (2)	Determine the dividend payment date.
   (3)	Prepare the 12 months cashflow forecast or other solvency test from the date of payment to ensure the company will be solvent immediately after the distribution is made.
   (4)	Directors to pass resolution to approve the declaration of dividend, entitlement date and payment date. If the constitution provides that shareholders are to approve the payment of dividend, then directors have to recommend the amount of dividend after the solvency test for shareholders’ approval.
   (5)	Secretary to issue the dividend voucher and cheques to the shareholders on the payment date.
   (6)	Check the bank statement to find out if there is any unclaimed dividend for the necessary action to be taken as required under the Unclaimed Money Act 1965. Unclaimed dividend is defined as all sums of money which are legally payable to the owner and have remained unpaid for a period of not less than 1 year after they become payable.

   
   
4. Advantages of Paying Dividend
   
   Paying dividends allows companies to share their profits with shareholders. The advantages of paying dividend are as follows:
   

   (1)	Reward shareholders for their loyalty and to incentivise them to continue holding the shares;
   (2)	Dividends provide certainty about the company’s financial well-being;
   (3)	Attracts more investors and creates demand for their shares; and
   (4)	Paying dividends sends a clear, powerful message about the company’s prospect, performance and indirectly demonstrates financial strength.

   
   
5. Way to Determine Profits Available for Distribution
   
   The illustration below demonstrates the way to determine the maximum amount of dividend a company can declare if the company is solvent:
   

   	Scenario 1	Scenario 2
   Audited Accounts for the financial year ended 31 December 2022	Retained loss of RM3 million	Retained profit of RM5 million
   Management Accounts as at 30 November 2023	Profits of RM1 million	Loss of RM3 million
   Profits available for distribution of dividend	RM1 million	RM2 million

   
   

Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.