Dividends out of profits

Dividends to shareholders must be paid out of the profits of the company. Directors have a duty to maintain the company's share capital. A company should not pay a dividend to shareholders if it has not earned the (income or capital) profits to do so. Section 254T simply states:

"A dividend may only be paid out of profits of the company."

Distributions that are not from profits are seen as a disguised return of paid up capital and require a different legal procedure. When considering this question, the New Zealand Courts have stated that:

"The payment of a dividend out of paid up capital will occur if the payment has the effect of reducing the company's net assets below the amount of its paid up capital"