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    Question

    Under Section 123 of the Companies Act, 2013, if a

    company has inadequate profits in the current financial year and intends to declare a dividend out of the accumulated profits (Free Reserves), which of the following conditions is incorrect as per the Companies (Declaration and Payment of Dividend) Rules, 2014?
    A The rate of dividend shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. Correct Answer Incorrect Answer
    B The total amount to be drawn from the accumulated profits shall not exceed one-tenth (10%) of the sum of its paid-up share capital and free reserves. Correct Answer Incorrect Answer
    C The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which the dividend is declared. Correct Answer Incorrect Answer
    D The balance of reserves after such withdrawal shall not fall below 15% of its paid-up share capital. Correct Answer Incorrect Answer
    E The company must obtain prior approval from the Central Government if it has defaulted in the redemption of debentures. Correct Answer Incorrect Answer

    Solution

    Under the Proviso to Section 123(1), a company which has  defaulted in the repayment of deposits  (under Section 73 or 74) is prohibited from declaring any dividend. There is no provision for Central Government approval to bypass this.   All other options (a, b, c, d) are mandatory conditions under Rule 3 for declaring dividends from reserves.

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