# When a Company is Prohibited from Declaring Dividend

## 1. Default in Repaying Public Deposits [Sec 123(6)]

A company that has failed to comply with the provisions of Sections 73 and 74 cannot declare dividend on its equity shares until such failure continues.

Section 73 — Prohibition on acceptance of deposits from public (and conditions for acceptance from members).
Section 74 — Repayment of deposits accepted before the commencement of the 2013 Act.

### Logic

Dividend is a return to shareholders, who are residual claimants. Depositors (creditors) are senior in the capital structure. Allowing a company to pay equity shareholders while it has defaulted on depositors would invert this hierarchy and harm public confidence in deposit-taking.

## 2. Section 8 Companies

A company licensed under Section 8 (formed with charitable objects — promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment) cannot pay any dividend to its members.

Its profits and other income must be applied solely for promoting its objects.
Members get no monetary return — only the satisfaction of furthering the charitable cause.

## Key Takeaway

Two independent gates: (i) deposit default (temporary prohibition until cured), and (ii) Sec 8 status (permanent prohibition by very nature of the company).

Worked example

### Example 1

Example 1: ABC Ltd. accepted deposits from public ₹50 crore that matured in March 2025. ₹10 crore remains unpaid as of September 2025. The Board recommends dividend on equity at 12% in October 2025. Not permitted — Sec 123(6) bars dividend declaration on equity until the deposit repayment default is cured.

### Example 2

Example 2: 'Greenleaf Environment Foundation Sec 8 Pvt Ltd' has a profit of ₹2 crore. The Board cannot recommend any dividend — Section 8 companies are absolutely barred. The profits must be ploughed back into the foundation's objects.

⚠️ Common exam mistakes

Believing Sec 123(6) bar applies to ALL kinds of dividend — the section refers specifically to dividend on equity shares.
Thinking Section 8 companies can declare dividend as long as it is 'reasonable' — they cannot declare any dividend at all.
Mixing Sec 73/74 default with Sec 73 only — both sections trigger the bar.

Bare-Act text Section 123(6) and Section 8(1)(b) · Companies Act, 2013 · click to expand

Section 123(6): A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares. Section 8(1)(b): The Central Government may, by licence granted in such manner as may be prescribed, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word 'Limited', or as the case may be, the words 'Private Limited', subject to the conditions specified in the licence and as may be prescribed... and intends to prohibit the payment of any dividend to its members.

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Prohibition on Declaration of Dividend

Worked example

⚠️ Common exam mistakes