Punishment for Failure to Distribute Dividend [Sec 127]
# Punishment for Failure to Distribute Dividend — Sec 127
## 1. Time Limit for Distribution
Dividend must be paid or the dividend warrant posted within 30 days from the date of declaration to every entitled shareholder.
Posting within 30 days protects the company from punishment even if the shareholder does not actually receive the warrant within 30 days (because postal delays are not under the company's control).
## 2. Punishment for Failure to Pay
If the company fails to pay the dividend or to post the dividend warrant within 30 days:
Person
Punishment
Every director who is knowingly a party to the default
Imprisonment up to 2 years AND fine ₹1,000/day for each day of continuing default
Company
Simple interest @ 18% per annum on the amount of dividend during the period of default
## 3. Exceptions — When No Offence Under Sec 127
No offence shall be deemed to have been committed where the dividend could not be paid for reasons such as:
1. Operation of any law preventing payment (e.g., court orders, attachments).
2. The shareholder has given directions to the company about payment, and those directions could not be complied with, and this has been communicated to the shareholder.
3. There is a dispute regarding the right to receive the dividend.
4. The dividend has been lawfully adjusted by the company against any sum due from the shareholder.
5. For any other reason, the failure was not due to default on the part of the company.
## Logic
Strict liability with safe harbours: Directors who knowingly default face jail; the company pays heavy interest. But the exceptions ensure no penalty when the failure is genuinely outside the company's control.
Posting within 30 days = safe harbour: Once the warrant is in the post, the company has discharged its statutory duty.
18% interest is a strong financial disincentive — it is higher than typical lending rates.
## Key Takeaway
The 30-day clock starts on declaration. Miss it and (i) directors risk 2-year imprisonment + ₹1,000/day fine, (ii) the company pays 18% p.a. interest. The five statutory exceptions are the only escape routes.
Worked example
### Example 1
Example 1 (Timely Posting): ABC Ltd. declared dividend on 20-Sep-2025. It posted warrants on 18-Oct-2025 (Day 28). Mr. X receives his warrant only on 5-Nov-2025 due to postal delay. No offence — posting within 30 days protects the company.
### Example 2
Example 2 (Default): XYZ Ltd. declared dividend ₹5 crore on 1-Sep-2025. It paid only on 30-Nov-2025 — a delay of 60 days beyond 30 days. Company pays interest = 5,00,00,000 × 18% × 60/365 ≈ ₹14.79 lakh. Directors knowingly party to default also face imprisonment up to 2 years + ₹1,000/day fine.
### Example 3
Example 3 (Exception - Lawful Adjustment): Mr. Y owes ABC Ltd. ₹50,000 as call money. The dividend payable to him is ₹40,000. The company adjusts the dividend against the call money due and does not 'pay' it. No offence — Sec 127 exception applies.
⚠️ Common exam mistakes
Stating the period as 21 days or 45 days — the correct period is 30 days.
Stating the interest rate as 12% (which is for Sec 124(3) UDA-transfer default) — the Sec 127 rate is 18%.
Forgetting that posting (not receipt) within 30 days fulfils the obligation.
Ignoring the five statutory exceptions when the question describes a dispute, attachment, or lawful adjustment scenario.
Stating imprisonment is up to 1 year — the correct maximum is 2 years.
Bare-Act text Section 127 · Companies Act, 2013 · click to expand
Section 127: Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent. per annum during the period for which such default continues: Provided that no offence under this section shall be deemed to have been committed: — (a) where the dividend could not be paid by reason of the operation of any law; (b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him; (c) where there is a dispute regarding the right to receive the dividend; (d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or (e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.