By , and -


  • The decision in DSHE Holdings [2021] NSWSC 673 provides guidance on the requirements directors must satisfy before declaring a dividend.
  • The decision highlights the importance the particular circumstances of individual directors (in particular the different positions of the executive and non-executive directors) when considering the statutory standard of care.

The decision to declare a dividend is an important function of company boards. Once or twice a year, directors are called upon to decide whether, and if so, how much, to pay to shareholders in dividends. What requirements does a director need to satisfy in order to declare a dividend? The recent decision in DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673 (‘DSHE Holdings) provides useful guidance as to what is required of directors when voting in relation to a dividend.

Breach of duty by declaring dividend?

DSHE Holdings concerned the well-known electronics retailer, Dick Smith. Dick Smith Holdings (‘DSH’) floated at the end of 2013, but collapsed in 2016. During 2015, DSH declared two dividends: an interim dividend of $16.555 million declared on 16 February 2015 and paid on 30 April 2015 and a final dividend of $11.826 million declared on 17 August 2015 and paid on 30 September 2015. The receivers of DSH brought proceedings alleging that the directors of DSH breached their duty of care under s 180 Corporations Act 2001 (Cth) (‘the Act’) and at law by participating in the vote to declare both the interim and final dividends. It was alleged that the directors of DSH did not have a proper basis to conclude that the payment of the dividends would not contravene s 254T of the Act.

Section 254T of the Corporations Act

Section 254T prohibits the payment of a dividend unless:

‘ (a) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and

(b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.’

This form of 254T came into effect on 28 June 2010 pursuant to the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth). Prior to this amendment the Act provided that a ‘dividend may only be paid out of the profits of the company’. The explanatory memorandum to the relevant Bill explained that the amendment arose because of confusion as to what constituted the profits of a company and was designed to simplify the law relating to the payment of dividends to make it easier for directors to understand their duties in that regard. Since coming into effect, there has been limited case law considering s 254T. One controversy that has been noted, but not decided, is whether there remains a general law principle that dividends must be paid out of profits (see: Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689 at [57]; Grant-Taylor v Babcock & Brown Ltd (In Liquidation) (2016) 245 FCR 402 at [37]).

Dividends and directors’ duty of care

Section 254T does not itself impose obligations on directors of a company. The fact that a company breaches s 254T does not itself mean that directors are in breach of s 180. As Ball J explained, although directors do not owe a general duty to prevent a corporation from breaching the law, they owe a duty to exercise reasonable care and diligence to prevent the harm that a breach of the law may involve. As his Honour explained: Precisely what that involves will depend on a variety of factors including the nature of the law, the risk of harm to which a breach will expose the corporation and what steps might reasonably have been taken to avoid the breach’ (at [447]).

In the context of a decision to pay a dividend, Ball J said that a director acting with reasonable care and diligence would, before voting in respect of a dividend, be familiar with the requirements established by s 254T and take reasonable steps to be satisfied that the company, in paying a dividend, would comply with those requirements (at [448]). His Honour further observed that it was difficult to see what consequences would flow from a failure to take those steps unless the payments of the dividends in fact caused the company to breach s 254T (at [451]-[452]).

The decision in DSHE Holdings

In issue in DSHE Holdings was whether DSH’s directors, at the time of declaring the dividends, could be satisfied of the third requirement of s 254T (no issue was taken in respect of the first two requirements). The central question was therefore whether the directors could be satisfied that payment of those dividends could be made without materially prejudicing DSH’s ability to pay its creditors. In considering this question, Ball J addressed three legal issues.

First, Ball J held that s 254T(1)(c) was directed towards creditors existing at the time of payment, not future creditors who do not exist at the time of payment (although his Honour noted that s 254T should be read in conjunction with the insolvent trading provisions in s 588G) (at [455]-[456]).

Second, Ball J considered the concept of ‘material prejudice’, noting that a reduced ability to pay creditors presumably includes a material increase in risk that creditors will not be paid at all and a material delay in paying creditors as they are due (at [457]).

Third, Ball J held that the declaration of a dividend is a decision which is relevant to the business operations of a company, because it affects the funds available for use by the company. Accordingly, it was a business judgment to which s 180(2) could apply, provided a director did not have a material shareholding in the company (at [459]-[462]).

Interim Dividend:

In respect of the interim dividend, Ball J found that DSH’s cash flow documents suggested that DSH had sufficient cash to pay the dividend and continue to pay its creditors (at [480]). Further, while there was evidence that DSH delayed paying its creditors as a cash management tool, Ball J found that this practice did not establish that payment of the interim dividend would cause material prejudice to DSH’s ability to pay its creditors (at [486]). In the circumstances, there was no breach of s 180 in relation to the interim dividend.

Final Dividend:

However, Ball J found that that position had changed (as a matter of fact) by the time of the final dividend. According to Ball J, it was not apparent on the face of DSH’s daily and weekly cash flows how DSH could pay its creditors at the time it was to pay the final dividend (at [503]). This finding, however, only led to a finding of breach of duty as against the CFO. This was because Ball J found that the CFO’s responsibilities distinguished him from the other directors (at [480], [497]). The CFO was the ‘executive with primary responsibility for overseeing the financial performance of the company, including monitoring its cash needs and the payment of creditors’ (at [480]).

The NEDs and CEO were found to be in a different position. They were entitled to rely upon the CFO to inform them of any issues with DSH’s financial position and the payment of creditors (at [494]-[496)]. Ball J found that the material provided to the CEO and the NEDs – including the audited accounts and a monthly cash flow – provided a sufficient basis for them to form the view that the interests of creditors would not be materially prejudiced by the payment of the dividend, and therefore no breach of s 180 was established against these directors (at [495]-[496]). His Honour accepted the evidence that the board was not required to ask for daily and weekly cashflow forecasts before declaring a dividend (at [477]). In reaching this conclusion, Ball J emphasised the importance of different roles and responsibilities of directors when considering the statutory standard of care imposed by s 180 (at [497]).

His Honour also concluded that it had not been established that DSH had suffered any damage as a consequence of the payment of the dividends (at [511]), noting that harm was not to be measured by the amount of the dividend but rather the consequences for the company of its payment (at [509]). Among other things, DSH’s receivership arose from a complicated series of events that occurred after the dividend was paid, and not because of the payment of the dividend (at [509]). Further, there was no evidence that any delays in paying trade creditors had caused DSH damage (at [510]).

Discharging a duty of care when declaring a dividend

The decision in DSHE Holdings provides insight into what may be required when declaring a dividend. The following steps may assist when determining whether to declare a dividend.

First, check what requirements are imposed by the company constitution. Any dividend must be paid in accordance with the company’s constitution (at [446]).

Second, be sure to have read and understood the company’s latest accounts. While it may not be part of the test imposed by s 254T, it remains controversial as to whether dividends can only be paid out of profits. It is prudent to check whether the company has made a profit before declaring a dividend.

Third, check if the company’s assets exceed its liabilities immediately before the dividend is declared and that the excess is sufficient for the payment of the dividend, as required by s 254T(1)(a).

Fourth, assess the impact that payment of the dividend might have on the company’s ability to pay its creditors, so as to be satisfied of the requirement in s 254T(1)(c).  What is required to perform this assessment may depend on the role of the director. In DSHE Holdings, Ball J found that the CFO was in a different position to the other directors.

Fifth, consider the solvency of the company and whether declaring or paying a dividend might cause the company to become insolvent or near insolvency (at [452], [456]).

Sixth, consider if the payment of the dividend is fair and reasonable to the company’s shareholders as a whole (s 254T(1)(b)). It has been said that ‘fair and reasonable’ conveys ‘one merged concept’ that requires an assessment of a wide range of matters relevant to the company (KGD Investments Pty Ltd v Placard Holdings Pty Ltd (2015) 110 ACSR 379 at [34]).

Seventh, confirm if the company has a dividend policy and, if so, whether the dividend being declared is consistent with that policy (at [472]).

Ross Foreman SC and Kate Boyd are barristers in PG Hely Chambers. Jerome Entwisle is a barrister in Banco Chambers.