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TMI Blog1984 (3) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... esponding new banks" of which profits will henceforth go to the Central Government. The banking business was nationalised with a view to serve the people better and to meet the needs of a developing economy, as the preamble said. Three days before the acquisition, the board of directors of the company had passed a resolution on July 16, 1969, declaring an interim dividend for the half year ending June 30, 1969, at the rate of Rs. 1.20 gross per share. This resolution was passed by the board of directors pursuant to the authority conferred on them by 84th article of the articles of association of the company which provided as follows: "The directors may from time to time pay to the members such interim dividend as appear to the directors to be justified by the profits of the company." Founding themselves on section 5(1) of the Act, the company claimed in the writ petition that the respondent, Union of India, be directed to pay the amount of interim dividend to the shareholders as it was a "liability" and an "obligation" of the Central Government under the said provision : Section 5(1) of the Act reads : "5. General effect of vesting. (1) The undertaking of each existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d India that in case of an interim dividend which the directors have resolved to pay, it is open to them at any time before payment to review their decision and resolve not to pay. This was established in England as early as 1901 by the decision of Joyce J. in Lagunas Nitrate Co. Ltd. v. Henry Schroeder Co. Schmidt [1901] 85 LT 22; [1901] 17 TLR 625. This case has since been followed in England and India. In India, the Supreme Court in J . Dalmia v. CIT [1964] 53 ITR 83 ; 34 Comp. Cas. 668, following Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625, held that the interim dividend is not a debt and, therefore, not an enforceable obligation. Shah J. said: "But a mere resolution of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to rescind the resolution before payment of the dividend." (p. 87) And again: "Even if the directors have resolved to pay interim dividend, they may before payment rescind the resolution." (p. 88) The legal position of final dividend is entirely different. Where a dividend is declared, it becomes a debt due from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any subsequent action of the company; but where directors have power to pay interim dividends, their decision to do so is not a declaration of dividend, and so can be rescinded or varied at any time before the dividend is paid." (p. 367) It is not necessary to multiply the authorities. But reference can usefully be made to Gore-Browne on Companies, 42nd edition, p. 297 ; Palmer's Company Law, 23rd edition, vol. I, p. 979 ; Halsbury's Laws of England, 4th edition, vol. 7, p. 355, para. 608 ; Topham and Ivamy's Company Law, 16th edition, p. 181. Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625, has been cited everywhere as the leading case for the proposition that a directors' declaration of interim dividend may be rescinded before payment has been made. Following Lagunas Nitrate's case [1901] 85 LT 22; [1901] 17 TLR 625, Brightman J. in Potel v. IRC [1971] 2 All. ER 504, 513, has recently held "that an interim dividend is, as it were, subject to the will of the directors until it is actually paid." There is a difference between declaring a dividend and paying a dividend. The declaration of a dividend by a company in general meeting creates a debt en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a separate "Interim dividend account". In a reserved judgment, Joyce J. said : "As at present advised I do not see why the board of directors might not before an interim dividend is actually paid, acting bona fide, reconsider the question as to whether it ought to be paid at all." (Lagunas Nitrate's case, [1901] 85 LT at p. 23). He held that this is so even if the cash to cover the proposed dividend has been placed into a separate account. The directors' paramount duty is not to pay dividends out of capital, and accordingly, after declaring an interim dividend and before payment, the directors can reconsider the matter and properly refuse to pay it for they may discover that it will, if paid, have to be paid out of capital. ( Palmer's Company Precedents, 17th edition, Part I, p. 601). In the present case, the directors passed the resolution declaring interim dividend on July 16, 1969. The Act came into force with effect from July 19, 1969. This extraordinary happening of acquisition of the most profitable banking business of the company by the Central Government would upset all estimates of profit and no directors in that situation will ever dream of paying interim divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a pious wish but not enforceable at law. It was an intention. But intention is one thing and payment another. In my opinion, the learned judge was wrong in holding that it was an "obligation" within the meaning of section 5(1). The fundamental fallacy in his reasoning is that he equates intention with an obligation to pay. The learned judge thought that Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625 did not apply. I think it is a complete answer to the case of the shareholders which the company espouses. Having held that the declaration of interim dividend is a liability of the Government, the learned judge decided against the company on another point. This other point is that dividend can be paid only out of profits and since the profits of the corresponding new bank under the Act are to be transferred to the Central Government under section 10(7), the Custodian of the new Punjab National Bank cannot be asked to pay the interim dividend. With all respect, this view is equally fallacious. Section 5(1) deals with the effect of vesting. On a take-over, the assets and liabilities vest in the Central Government, the taker of the undertaking. That all profits in future ..... X X X X Extracts X X X X X X X X Extracts X X X X
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