Corporation Law: Midnight Soil Pty Ltd Dividend Payment Analysis

This case study examines the dividend payment decision of Midnight Soil Pty Ltd (The Soils), a small proprietary limited company. The assignment analyzes whether the company can pay a proposed dividend of 22 cents per share, considering a potential cash flow issue due to a recent loss of contract. The analysis applies relevant sections of the Corporations Act 2001, particularly S. 254SA, S. 254W (2), and S. 254T, alongside legal precedents like Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 and Grant-Taylor v Babcock & Brown Ltd (In Liquidation) [2015] FCA 149. The conclusion determines that the proposed dividend is not payable because the company would not be solvent after the payment, thus emphasizing the importance of financial stability and adherence to corporate law principles.

Running head: CORPORATION LAW
CORPORATION LAW
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1CORPORATION LAW
Issue
Whether the proposed dividend by the Midnight Soil Pty Ltd (The Soils) is payable.
Rule
According to S. 254SA of the Corporations Act 2001, a company needs not to pay its
members dividend if it is limited by guarantee.
According to S. 254W (2) of the Corporations Act 2001, as per the terms the shares
which are on issue in a proprietary company, may be payable upon the discretion of the directors.
According to S. 254T of the Corporations Act, 2001, a company needs to pay the
dividend to its shareholders only if the assets of the company exceeds the liability of the
company before the declaration of the dividend and if the excess is not insufficient in making the
payment; and if the payment of dividend is reasonable and fair as a whole to the shareholders of
the company; and if the dividend’s payment does not prejudice materially the payment ability of
the said company to its creditors.
In Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 it was laid
down that dividend can only be paid out the arising profit which is a general law.
A company can cancel a declared dividend before the payment of the same if the
company contains such provision in its article of association.
In Grant-Taylor v Babcock & Brown Ltd (In Liquidation) [2015] FCA 149 it was held
by the Federal Court that as long as the payment of dividend is not affecting the solvency of the
company, paying the dividend is lawful.

2CORPORATION LAW
Application
In this given scenario, Midnight Soil Pty Ltd (The Soils) is a small proprietary limited
company. They have five directors who have agreed to discuss about the payment of 22 cents per
share in the upcoming board meeting, but a potential issue of cash flow was identified as the
company suffered a major loss of a contract. It has been assessed that the revenue loss can be
covered by the company in short term because of the carried over positive net asset position form
previous financial year. There is a further opinion that during the next quarter the problem of
cash flow would arise again. According to S. 254SA of the Corporations Act 2001, the directors
of the company has the discretion of paying the proposed dividend. The company needs to pay
the proposed dividend only when the company is making profit. In absence of profits there is no
need of paying dividends. There is s general law that a dividend is only payable in circumstances
where the company is making profit, thus dividends are only payable out of the arising profit.
Hence, it supports the principle laid down in the Wambo Coal Pty Ltd v Sumiseki Materials Co
Ltd [2014] NSWCA 326 case and also the provisions laid down in S. 254T of the Corporations
Act 2001. If the company pays the proposed dividend the company will be running in loss in the
next quarter as there is potential of a cash flow in the company. Thus, the principles laid down in
the Grant-Taylor v Babcock & Brown Ltd (In Liquidation) [2015] FCA 149 case are applicable
here.
Conclusion
Therefore, it can be concluded that, the proposed dividend by the Midnight Soil Pty Ltd (The
Soils) is not payable as the company would not be solvent after such incident.

3CORPORATION LAW
Reference
Corporations Act 2001
Grant-Taylor v Babcock & Brown Ltd (In Liquidation) [2015] FCA 149
Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326