30/08/2010

‘ambulance chaser’ noun –  a derogatory term referring to a lawyer who goes to extreme and morally questionable lengths to secure a client.

Recently one of our clients received an email from a law firm about “Updating Company Constitutions”.  The email urged readers to take immediate action to amend their company’s constitution.

According to the email, recent changes to the Corporations Act meant that “companies can no longer declare a dividend out of profits only”. It then stated that “Constitutions must be amended before any dividends are paid this financial year”.

In our view this is an incorrect interpretation of the recent changes to the Corporations Act.  Worse than that, it is misleading.  We say ‘worse’ because being misleading is a prohibited act in ‘trade and commerce’ under the Trade Practices Act.

Section 254T of the Corporations Act has been amended to read as follows:

“A company must not pay a dividend unless:

1. 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
2. the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
3. the payment of the dividend does not materially prejudice the company's ability to pay its creditors.”

The section is clear in its wording. There are issues like what constitutes a ‘fair and reasonable’ dividend or when does a dividend ‘materially prejudice’ a company’s ability to pay creditors.  But these issues will be sorted out over time when the Courts have a chance to interpret the wording.

In the meantime why would you need to amend your company’s constitution?  The section prohibits certain action.  The constitution may permit the payment of dividends out of profits but the fact that the constitution doesn’t contain the same prohibition as the section is irrelevant. The company is still required to comply with the law and is able to do so without any amendments to the constitution.

Companies don’t need to change their constitutions every time the Corporations Act prohibits particular conduct.

So the message is firstly make sure that you comply with the Act when paying dividends and secondly don’t listen to ‘ambulance chasers’ trying to mislead you into spending money on needless changes to your company’s constitution.

For more information on this topic or any company law queries please contact Peter Townsend at peter@townsendslaw.com.au or ring (02) 8296 6222.