Stridewalk Limited, a listed company engaged in the manufacturing and export of premium shoes and accessories, has been undergoing financial…
CA Intermediate · Corporate and Other Laws · RTP · September 2025
Stridewalk Limited, a listed company engaged in the manufacturing and export of premium shoes and accessories, has been undergoing financial restructuring over the past few years. After several years of operational losses and sluggish growth, the Board recently appointed a new Production Manager, Mr. Arjun Mehra, whose strategic improvements have helped to revive the company's margins and production efficiency. In light of the improved performance and renewed investors' confidence, the Board of Directors, at its meeting held on 20th April, 2025, resolved to recommend a final dividend of 50 lakh to its equity shareholders a notable development as this would be the first dividend declaration in eight years. The financial data available is as follows: Current year profit (after providing for depreciation and necessary reserves):16 lakhAccumulated profits /free reserves over the past eight years:170 lakhPaid-up share capital of the company:680 lakhThe proposed dividend of 50 lakh is intended to be funded partly from the current year's profit and partly from the accumulated profits of previous years. As the current year's profits alone are not sufficient to meet the proposed dividend payout, the company plans to draw from free reserves as permitted under the Companies Act, 2013. With reference to the provisions of the Companies Act, 2013 and the Companies (Declaration and Payment of Dividend) Rules, 2014, examine whether the proposed dividend declaration by Stridewalk Limited complies with the legal conditions applicable in the case of inadequate profits.
Suggested Answer and Working Notes:
According to second proviso to section 123, where in any year there are no adequate profits for declaring dividend, the company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the free reserves only in accordance with the procedure laid down in Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. Free Reserves means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend. Under Rule 3 such declaration shall be subject to the following conditions: CONDITION I The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by the company in the immediately preceding three years. However, this condition shall not apply if the company has not declared any dividend in each of the three preceding financial year. CONDITION II The total amount to be drawn from such accumulated profits shall not exceed 10% of its paid-up share capital and free reserves as appearing in the latest audited financial statement. CONDITION III The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared and only thereafter, any dividend in respect of equity shares shall be declared. CONDITION IV The balance of reserves after such withdrawal shall not fall below 15% of its paid- up share capital as appearing in the latest audited financial statement. In the given question, since Stridewalk Limited current year profits of 16lakh are insufficient to meet the dividend requirement of 50lakh, hence the company has to fulfil the conditions as prescribed under Rule 3 (mentioned above). Particulars Amount (in ₹) Amount of dividend declared (A) 50 lakh Current year profits (B) 16 lakh Amount to be withdrawn accumulated profits [(A)- (B)] 34 lakh Accumulated profits during the past 8 years 170 lakh Paid up share capital of the company 680 lakh Fulfilment of Conditions mentioned in Rule 3 Conditions Calculation Met/ Not Met I This condition is not applicable the company has not declared any dividend in each of the three preceding financial year. II Paid-up share capital and free reserves = 680+ 170 = 850 lakh (C) Met 10% of (C) = 85 lakh Amount to be withdrawn accumulated profits i.e. 34 lakhs is less than (C) Met III The company has since made profit in the financial year in which dividend is declared. Met IV Free Reserves (D) = 170 lakh Met Amount drawn for payment of dividend (E) = 34 lakh Balance of reserves after such withdrawal (F) =(D)- (E) = 136 lakh 15% of its paid up share capital (G) = 102 lakh (F) more than (G) In the given question, since all the conditions are met, hence Stridewalk Limited has validly declared dividend.
Topics: Declaration and Payment of Dividend
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