The primary cultivation of each of the shareholders is the right to dividend, i.e. the right to participate in the profits achieved by the company. The ‘right to participate in profit’ shall be understood to mean the profit resulting from the annual accounts and intended to be shared by a resolution of the Assembly of Shareholders.
However, shareholders do not have the total freedom to pay dividends and they must comply with the laws and articles of association. The most important document in a limited liability company is the company's contract, which lays down the operating rules, including the possibility to specify the dividend payment rules. If such provisions are not included in the articles of association, then the provisions of the Commercial Companies Code, i.e. the provision, will apply. Article 192 And the next Code.
Dividend payment at loss
If the company has achieved a profit, the partners have a potential right to pay a certain amount – the condition for the actual dividend is to adopt a resolution by the meeting of shareholders on the distribution of the amount. However, what if the company notes a loss in its financial statements?
Is it a requirement for the company to make a profit in the last financial year? Among the representatives of the doctrine is the view that the loss in the last financial year or the uncovered loss of previous years reduces the amount of dividend, but does not exclude its payment.
In order to determine whether the company retains the right to pay dividends despite the loss, the formula indicated in Article 192 Commercial Companies Code.
Under the provision laid down, the amount to be allocated among the shareholders must not exceed the profit for the last financial year, plus undistributed profits from previous years and amounts transferred from the profit-set reserves and reserves which may be allocated to the division. This amount should be reduced by uncovered losses, own shares and amounts which, in accordance with the law or the articles of association, should be transferred from profit for the last financial year to reserves or reserves.
If the result is positive, the company has a balance sheet surplus exceeding the amount of the uncovered loss, and the dividend payment will not result in the capital funds being depleted. A zero result means that there are no dividend funds (a balance sheet surplus at the disposal of the company) and therefore no payout.
The negative result, on the other hand, indicates the depletion of capital funds. The company must then first the order in which the profit will be generated to restore the lost coverage of these funds. (yes: A. Opalski (ed.), Commercial Companies Code. Tom IIA. Limited liability company. Comment. Article 151-226, Warsaw 2018).
Dividend capital
In practice, this means that if losses are demonstrated in the financial statements of the company to shareholders, only the possibility of sharing profits from previous years remains.
If, therefore, the company has not shown a profit for the last financial year, but has reserve or reserve funds which may be allocated to a breakdown greater than the sum of: (i) losses for the last and previous financial years, (ii) the value of the own shares (iii) of the amounts which, in accordance with the law or the company's contract, should be transferred from the profit for the last financial year to reserves and reserves, it may pay dividends.
If neither the law nor the articles of association provide for obligations to allocate a certain amount of profit to reserves, the deduction shall cover only the amount of uncovered losses and own shares.
It should be stressed that the reserve capital can be used to pay dividends only in the part where it was created from profit. In the doctrine it is pointed out that it is not possible to allocate funds from the agio reserve (such as S. Sołtysiński [in:] S. Sołtysiński, A. Szajkowski, A. Szumański, J. Swiss, Codex..., p. II, 2005, p.
387; M. Rodzinkiewicz, Codex... 2018, p. 399). Provision Article 192 The Commercial Companies Code also indicates that the profit shall include ‘the amounts transferred from the profit-set reserves and reserves which may be allocated’ and at the same time shall not specify what they are specifically.
In such a case, if the articles of association do not contain provisions indicating in which part of the capital created out of profit may be allocated to distribution among the shareholders, that amount should be clearly specified in the resolution of the meeting of the shareholders of the company.
Written by: Magdalena Mączka. Legal advisor, Russell Bedford Dmowski and Associates Law Firm Sp. k.