The Thirty-Day Payment Rule and Section 127
A dividend declared must be paid within thirty days from the date of declaration. A failure attracts Section 127: the company is liable to pay simple interest at eighteen per cent per annum on the unpaid amount for the period of default, and every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine. The interest is not a substitute for payment; it is an additional consequence.
The Section 123(6) Prohibition
Section 123(6) provides that a company which fails to comply with Sections 73 and 74 (deposit acceptance and repayment) shall not, so long as the failure continues, declare any dividend on its equity shares. The prohibition is continuing: a company in deposit-default cannot cure the dividend restriction by paying the deposit after declaring the dividend. The board must verify the deposit-compliance status before recommending a dividend.
The Director’s Knowledge Defence
The Section 127 penalty applies to a director “knowingly a party to the default.” A director who was not present at the board meeting, did not participate in the decision, and was not informed of the non-payment may have a defence on knowledge. The defence is factual and requires contemporaneous records: board minutes, communications, and the payment register.
The Transfer to the Unpaid Dividend Account
Where the dividend remains unpaid, the company must transfer the unpaid amount to the Unpaid Dividend Account within seven days from the expiry of the thirty-day period. A failure to transfer attracts additional interest and penalty. The unpaid dividend account balance is the source for the IEPF transfer after seven years.
Remediation and Compounding
A company that has defaulted should pay the outstanding dividend with interest, transfer the unpaid amount to the designated account, and file a suo motu compounding application. The application should include the payment proof, the board resolution, and an affidavit explaining the delay. A compounding order does not erase the civil liability to the shareholder, but it can resolve the penalty exposure.
Call to Action: For dividend default remediation, Section 127 defence, or compounding application support, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.