Section 127 Punishment for failure to distribute dividends – Companies Act 2013

Amended and updated notes on section 127 of Companies Act 2013. Provisions and rules related to punishment for failure to distribute dividends.

Amended and updated notes on section 127 of Companies Act 2013. Detail discussion on provisions and rules related to punishment for failure to distribute dividends.

Chapter VIII (Sections 123127) of the Companies Act, 2013 (CA 2013) deals with the provisions related to declaration and payment of dividend. Section 127 of CA 2013 provides for punishment for failure to distribute dividends.

Recently, we have discussed in detail section 126 (Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares) of CA 2013. Today, we learn the provisions of section 127 of Companies Act 2013.

Section 127 of the Companies Act, 2013 has been notified by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 2754(E) issued dated 12.09.2013. This notification shall come into force from 12th September, 2013 i.e. the commencement date of section 127 is 12-09-2013.

Name of ActThe Companies Act 2013
Enacted byParliament of India
Administered byMinistry of Corporate Affairs (MCA)
Number of Chapters29
Number of Sections484 (470-43+57)
Number of Schedules7
You are reading:
Chapter No.VIII
Chapter NameDeclaration and Payment of Dividend
Section No.127
Section NamePunishment for failure to distribute dividends
Monthly Updated EditionCompany Law PDF

Punishment for failure to distribute dividends

A company may declare its dividend in compliance with the provisions of section 123 of the Companies Act, 2013 with effect from first day of April, 2013. Thereafter, such declared dividend must be paid within 30 days from the date of its declaration to all shareholders entitled to the payment of the dividend.

However, if declared dividend has not been paid on time, a warrant may be dispatched in respect thereof within thirty days of the declaration of dividend of a company. In case of joint shareholders, dispatch the dividend warrant to the first named shareholder.

But, if a company does not pay the declared dividend or a dividend warrant has not been posted in respect thereof within specified period of 30 days, the company and directors shall be punishable as per section 127 of the Companies Act, 2013.

According to section 127 of CA 2013, where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend:

1) Two Years Jail to Directors:

Every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years; and

2) At least 1,000 rupees Fine to Directors:

Such directors shall also be liable to pay fine not less than 1,000 rupees for every day during which such default continues; and

3) 18% Interest on Unpaid Dividend:

The Company shall be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.

However, the following are the exceptions provided under section 127 of CA 2013 under which no offence shall be deemed to have been committed:

  • (a) Operation of Law: where the dividend could not be paid by reason of the operation of any law; or
  • (b) Shareholders Directions: where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him; or
  • (c) Dividend Rights: where there is a dispute regarding the right to receive the dividend; or
  • (d) Dividend Adjustment: where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
  • (e) Other Reasons: where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

Note that the provisions of section 127 of CA 2013 came into force on 12th September, 2013 which provides for punishment for failure to distribute dividend on time. Therefore, you may refer the corresponding section 207 of the Companies Act, 1956 i.e. penalty for failure to distribute dividends within thirty days for earlier periods.

You should also note that the period of imprisonment for default directors has been reduced to 2 years from 3 years in compare to earlier corresponding section 207 of the Companies Act, 1956.

Under the provisions of the Companies Act, 2013, it shall be deemed to be an offence if a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has not been communicated to the shareholder. Whereas, there was no need to inform to such shareholders that his directions cannot be complied with under section 207 of the Companies Act, 1956.

Section 127 of Companies Act 2013: Punishment for failure to distribute dividends

Section 127 shall come into force on 12th September, 2013 vide Notification No. S.O. 2754(E) dated 12.09.2013.

Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues:

Provided that no offence under this section shall be deemed to have been committed: —

  • (a) where the dividend could not be paid by reason of the operation of any law;
  • (b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;
  • (c) where there is a dispute regarding the right to receive the dividend;
  • (d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
  • (e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

Exception/ Modification/ Adaptation:

In case of Nidhis, section 127 shall apply, subject to the modification that where the dividend payable to a member is one hundred rupees or less, it shall be sufficient compliance of the provisions of the section, if the declaration of dividend is announced in the local language in one local newspaper of wide circulation and announcement of the said declaration is also displayed on the notice board of the Nidhis for at least three months. – Notification No. G.S.R. 465(E) dated 5th June, 2015


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