Cyprus Company Law Insights: Distribution of Dividends

The distribution of dividends to shareholders is often a matter of contention between shareholders and/or management. While the distribution of dividends by Cyprus entities is a key company law matter, the Cyprus Companies Law, Cap 113 (“Companies Law”) and ancillary laws and regulations contain a limited number of provisions with respect to dividends or the methods for declaring and distributing them, especially in relation to private companies. These matters are primarily guided by (i) common law principles and (ii) each company’s articles of association.

In accordance with the model articles found in Table A of the Companies Law, a company has the ability to declare and pay both interim and final dividends. While the board of directors declares and approves interim dividends from the company’s profit, final dividends must be declared during general meetings, and these cannot exceed the amount suggested by the directors.

The above limitations set out in Table A are a reaffirmation of the common law principle that, in keeping with the maintenance of capital rule, dividends cannot be distributed from the company’s capital or amount to a capital reduction. Dividends must come solely from the company’s profit (current year or accumulated in the form of retained earnings).

In particular, the applicable common law principles, inter alia, provide that, the distribution of dividends is an internal matter of the company, and if it is done honestly and does not violate any of the provisions of the company’s articles of association, the courts will be reluctant to interfere with the discretion exercised by the directors or with the powers exercised by the company in a general meeting, within its articles of association. Yet, the directors must in all cases act in the best interests of the company and, in any event, dividends cannot be paid if this would result in the company being unable to pay its debts as they fall due. This solvency requirement takes precedence over all other rules in this area of law.

The Companies Law does not define the term “profit” or “profit available for distribution”. Therefore, English case law serves as a source of guidance. Even though the principles as set out in the English judicial precedents on this matter have since been replaced by statutory provisions in the UK, the Cyprus courts have adopted the English common law principles. English case law defines “profit” as a business term that refers to the gain achieved over a particular period, and “profit available for distribution” is understood as the amount that directors determine can be distributed to shareholders after accounting for reserves and other necessary provisions. Directors may declare or propose a distribution of dividends out of profits available for dividends including profits which are in a (positive) reserve fund formed out of profits retained or out of profits which have been carried forward without being placed in reserve, provided that the directors are acting in good faith and are taking into account that the company would still be able to pay its debts.

An area of controversy and discussion in determining “profit available for distribution” is whether a private company, being in a net liabilities position (negative equity), is prohibited under Cyprus law from making a distribution of a final dividend out of the trading profit of a financial year.

English judicial precedents suggest that private companies do not need to offset past losses before distributing dividends, provided the financial year in question has profits available for dividends. However, it remains unclear whether undistributed profits from previous years can be distributed in future years when the company is in a net liabilities position and those profits have been absorbed into a negative reserve to cover prior losses.

The Companies Law provides similar regulations concerning the distribution of dividends for both private and public companies. Section 169A of the Companies Law provides that a public company cannot (except for cases of reduction of issued capital) make distributions to its shareholders, when, on the closing date of the last financial year, the net assets, as already presented in its annual accounts, or as could arise as a result of such distribution, are below the total of the subscribed capital and the reserves, the distribution of which the law or the articles do not allow. The amount that can be distributed to shareholders must not exceed the profits of the last financial year, plus any carried-forward profits at the end of the last financial year and sums drawn from reserves available for this purpose, less any losses from previous financial years, and sums placed into reserve in accordance with the law or the articles of association.

Nevertheless, the procedural and regulatory requirements vary for public companies due to the oversight of the Cyprus Securities and Exchange Commission (CySEC), which serves as the regulatory authority for the Cyprus Stock Exchange (CSE). Consequently, public companies operating in Cyprus are required to comply with supplementary regulations provided for by CySEC and any additional regulations issued pursuant thereto.

In particular, pursuant to Section 25(3)(d) of the Law Providing for Transparency Requirements in Relation to Information about Issuers Whose Securities are Admitted to Trading on a Regulated Market (190(Ι)/2007), public companies must publish notices or distribute circulars concerning the allocation and payment of dividends or the issue of new shares, including information on any arrangements for allotment, subscription, cancellation or conversion.

Furthermore, pursuant to Section 131(b) of the Cyprus Securities and Stock Exchange Law of 1993 (14(I)/1993), the issuing company shall provide shareholders with appropriate information on the distribution and payment of dividends and the issue of new shares, including the exercise of preferential rights, the granting of new shares, the subscription to capital, the waiver of related rights, exchanges and conversions, by publishing notices or sending letters to shareholders. The Regulatory Administrative Act 379/2014 provides an additional obligation on the issuing company to announce to the CSE any decision of its management bodies to pay or not to pay dividends, distribute profits or pay interest in respect of securities listed on the CSE.

Directors involved in the unlawful distribution of dividends from capital, except where authorised by the relevant Companies Law provisions, are prima facie jointly and severally liable to repay the amount. Furthermore, shareholders who have, with full knowledge of the facts, received dividends paid out of capital may be liable for improper distributions. More generally, it shall be noted that under insolvency law, the general principle is that from the moment the company is unable to pay its debts as they fall due, the directors’ duties shift towards protecting the interests of the company’s creditors rather than promoting the interests of the shareholders. In this respect, in case the company becomes insolvent, directly or indirectly, due to an unlawful declaration and payment of dividend/s, the directors may be liable towards the company and its creditors by virtue of applicable insolvency principles.