Dividend Out of a Revaluation Reserve, a Late-registered Charge and an Unregistered Transferee
Sundara Agrotech Private Limited was incorporated in 2019 with paid-up capital of ₹2,00,00,000. On 31 March 2025 it had accumulated losses of ₹85,00,000. At its board meeting on 12 May 2025 the directors declared an interim dividend of ₹1,20,00,000 for 2024-25, to be funded by ₹90,00,000 drawn from a 'revaluation reserve' created in 2022 when the factory land was revalued upwards, and ₹30,00,000 of the year's profit. The dividend was paid on 9 June 2025. On 20 May 2025 the company created a charge over its plant and machinery in favour of a bank for a ₹1,50,00,000 loan; Form CHG-1 was filed with the Registrar on 4 July 2025 together with the prescribed additional fee. Meanwhile Rohit, who had bought 5,000 shares from a promoter in March 2025 and lodged the transfer deed with the company on 25 March 2025, has received no dividend and was refused entry to the annual general meeting, the board having passed no resolution on the transfer.
1. Was the declaration of the ₹1,20,00,000 interim dividend valid?
Read the worked answer
Section 123 prescribes the sources. A company may declare dividend only out of the profits of the year for which the dividend is declared, or out of undistributed profits of previous years, or both, after providing for depreciation; and the Companies (Declaration and Payment of Dividend) Rules, 2014 bar a dividend where accumulated losses equal or exceed paid-up capital plus free reserves. Here the loss threshold is not crossed (₹85,00,000 against paid-up capital of ₹2,00,00,000), so the declaration does not fail on that ground.
The revaluation reserve is not a permissible source. A revaluation reserve represents an unrealised appreciation in the book value of land; it is not profit and is not a free reserve available for distribution. Only the ₹30,00,000 of the year's profit was a legitimate source.
Conclusion. The dividend is valid only to the extent of ₹30,00,000; the ₹90,00,000 portion is an unlawful distribution out of capital. The company should have confined the interim dividend to the realised profit, after depreciation. Directors who declare a dividend from an impermissible source breach their fiduciary duty and may be liable to make good the amount, and shareholders who received the dividend with notice may be required to refund it.
Procedural compliance was otherwise sound. Section 123(4) requires the amount to be deposited in a separate bank account within five days and paid within thirty days of declaration; payment on 9 June falls inside that window.
2. Is the charge created on 20 May 2025 validly registered, given that Form CHG-1 was filed on 4 July 2025? What would the position have been had the company filed nothing?
Read the worked answer
Section 77 allows a 60-day window. A company creating a charge must file particulars with the Registrar within thirty days of creation. The proviso permits filing within a further thirty days on payment of the additional fee prescribed by the Companies (Registration of Charges) Rules, 2014. The charge was created on 20 May 2025; thirty days expired on 19 June, and the extended period ended on 19 July 2025. Filing on 4 July was within the extended window and the additional fee was paid, so the registration is valid. It is late, but late filing permitted by the proviso is not defective filing.
What the company should note. The charge is enforceable against the bank as from creation; registration protects priority against subsequent charges and gives public notice. The company and its officers would be exposed to penalty for the contravention of section 77, though the payment of the additional fee and the curative effect of registration mitigate the position.
If nothing had been filed. Under section 77(3), the charge would be void against the liquidator and any creditor of the company, and the loan secured by it would be treated as unsecured debt in insolvency. The bank's security interest would effectively collapse, and the company and every officer in default would additionally be punishable under section 86. Non-filing is therefore not a mere technicality - it converts a secured lender into an unsecured one.
3. Is Rohit entitled to the dividend and to attend the annual general meeting? What should the board have done about the transfer deed lodged on 25 March 2025?
Read the worked answer
Rohit is not yet a member. Section 2(55) defines a member as a subscriber to the memorandum and every other person who agrees in writing to become a member and whose name is entered in the register of members. Rohit's name has not been entered, so he is only a transferee with an equitable interest. Till registration, the promoter whose name stands in the register is the member entitled to the dividend and to vote; the company pays the registered holder, and Rohit's remedy is against his transferor for the dividend received.
The board's delay is a separate default. A company must register a transfer or refuse it, and where it refuses it must send notice of refusal to the transferee and transferor within thirty days of lodgement under section 56(4). Doing nothing for months is the worst of both worlds: it neither perfects Rohit's title nor gives him a refusal he can challenge. If the articles of this private company contain a pre-emption or restriction clause, the board should have considered it and recorded its decision.
Rohit's remedy. On refusal, or on failure to act, he may appeal to the Tribunal under section 58. He should also ensure the requisite share transfer form and stamp duty are complete and that the transferor has co-signed; the company may then be directed to register the transfer.