We declared a dividend but have not paid it: what the 30-day rule means

Your board or your general meeting declared a dividend. Weeks have passed. Some shareholders have been paid. Some have not. Maybe a bank detail was wrong. Maybe cash was tight. Now you want to know how bad this is, and what to do today.

This article is about one question: what happens under section 127 when a declared dividend is not paid within thirty days. What happens to the unpaid money afterwards, in the Unpaid Dividend Account and the Investor Education and Protection Fund, is covered in our separate article on the dividend deposit and unpaid-dividend cycle under sections 123 and 124. Here we only point to it.

Why the 30 days matter

Section 127 of the Companies Act, 2013 applies where a dividend has been declared by a company but has not been paid, or the warrant for it has not been posted, within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend (s.127, Companies Act 2013).

Three details are easy to miss.

First, the clock runs from the date of declaration. It does not start when you finalise the bank file, when the accounts team gets to it, or when the record date falls.

Second, the words are "any shareholder". One unpaid shareholder out of fifty is enough to bring the section into play. The law does not wait until the whole dividend is unpaid.

Third, the section is met by either of two failures: not paying, or not posting the warrant. If you pay by cheque or warrant, posting it inside thirty days is what the section asks for. If you pay electronically, the money has to reach the shareholder's account inside that window, because there is no warrant to post.

The Act also says that "dividend" includes any interim dividend (s.2(35), Companies Act 2013). So an interim dividend declared by the board runs on the same thirty-day clock as a final dividend declared at the annual general meeting.

What section 127 says will happen

Section 127 names three consequences. Two fall on people, one on the company.

Directors. Every director who is knowingly a party to the default is punishable with imprisonment which may extend to two years, and with a fine of not less than one thousand rupees for every day during which the default continues (s.127, Companies Act 2013).
The company. The company is liable to pay simple interest at the rate of eighteen per cent per annum during the period for which the default continues (s.127, Companies Act 2013).
The "knowingly" test. Director liability needs knowledge. A director who did not know of the default, and was not a party to it, is not caught by the imprisonment and fine part of the section. Whether a particular director knew is a question of fact.

Note what the interest is. It is simple interest, not compound. It is charged on the dividend that stayed unpaid, for the period of the default, at eighteen per cent a year.

A worked illustration, with made-up numbers. Say a dividend of ₹2,00,000 payable to one shareholder is declared on 1 June and is still unpaid on 31 July. The thirty days end on 1 July. If the default is cured on 31 July, the default has run for about thirty days. Simple interest at eighteen per cent a year on ₹2,00,000 for thirty days is about ₹2,959 (₹2,00,000 x 18% x 30/365). That is the interest on one shareholder's unpaid sum. Where several shareholders are unpaid, work it out for each. The illustration is a rough count to show the method; take the exact day count from your own records.

When no offence is committed

Section 127 has a proviso listing cases where no offence under the section is deemed to have been committed. In plain words:

The dividend could not be paid by reason of the operation of any law.
The shareholder gave directions to the company on how the dividend is to be paid, those directions cannot be complied with, and this has been communicated to the shareholder.
There is a dispute regarding the right to receive the dividend.
The dividend has been lawfully adjusted by the company against any sum due to it from the shareholder.
For any other reason, the failure to pay the dividend or to post the warrant within the thirty days was not due to any default on the part of the company.

All of these are in the proviso to section 127.

Look at item 2 carefully. It protects you only if the directions cannot be followed and you have told the shareholder. A silent failure to pay does not qualify. If a bank rejected a transfer and nobody wrote to the shareholder, that item does not help you.

Item 3 is about a real dispute over who is entitled to the dividend. It is not a dispute you create after the date has passed. Item 4 needs the set-off to be lawful and the sum to be actually due from the shareholder to the company.

Item 5 turns on facts. It is a wide clause, but it is not a free pass. It asks whether the failure was "due to any default on the part of the company". A company that never set up the payment run is hard pressed to say the failure was not its default. Keep the paper trail: the rejected bank advice, the emails asking for fresh details, the dates.

Whether an exception fits your facts is a judgement for you and your CA. Do not stretch an item to fit.

Who counts as "shareholder entitled to the payment"

Dividend is paid to the registered shareholder of the share, or to the shareholder's order, or to the shareholder's banker (s.123(5), Companies Act 2013). That is who the thirty days are measured against. It also tells you whom not to pay. A person who says they bought the shares last week, or who is acting on informal instructions, is not the registered shareholder merely because they ask. Paying the wrong person does not discharge the dividend, and the registered shareholder is still unpaid.

The same sub-section lets a cash dividend be paid by cheque or warrant or in any electronic mode to the shareholder entitled to it (s.123(5), Companies Act 2013). So you do not need to send physical cash.

Where a transfer of shares has been lodged with the company but not yet registered, section 126 says the company must deal with the dividend on those shares in a particular way, unless the registered holder authorises payment to the transferee in writing (s.126, Companies Act 2013). If this is why a dividend is unpaid, read section 126 with your CA before deciding whom to pay.

What you can still do today

You are late, but you are not out of options. A sensible order is this.

1. Pay the shareholders you can pay, now. Use cheque, warrant or an electronic mode to the registered shareholder, to their order or to their banker (s.123(5), Companies Act 2013).

2. List who is unpaid and why. For each shareholder, write down the amount, the reason payment failed, and what you did about it. This list becomes your working file for everything below.

3. Contact each unpaid shareholder in writing. Ask for fresh bank details, or confirm the details on record. If a shareholder's directions cannot be followed, tell them so in writing. That communication is what the proviso to section 127 looks for (proviso (b) to s.127, Companies Act 2013).

4. Check whether an exception fits. Go through the five items above against your facts. A genuine dispute about who is entitled, or a lawful set-off, may put you outside section 127. Take professional advice before relying on one.

5. Compute the interest. Simple interest at eighteen per cent per annum for the period the default continues (s.127, Companies Act 2013). Work out the figure per shareholder from day thirty-one. Settle with your CA and board how it is to be dealt with in the accounts.

6. Look at the unpaid-dividend account position. The unpaid or unclaimed balance has its own transfer requirement under section 124, with its own interest and penalties. That is a separate duty and is covered in our dividend deposit and unpaid-dividend article. Do not assume that fixing section 127 fixes it.

Two quick checks on the declaration itself

Two points sit outside section 127 but often explain why a dividend is stuck.

First, the amount of a dividend, including an interim dividend, is to be deposited in a scheduled bank in a separate account within five days from the date of declaration (s.123(4), Companies Act 2013). If that never happened, you have a second gap to close.

Second, a company that fails to comply with sections 73 and 74, which deal with deposits, cannot declare any dividend on its equity shares so long as that failure continues (s.123(6), Companies Act 2013). A dividend declared during such a failure is a problem in itself. Raise it with your CA first.

If you doubt the source of the dividend, for example whether it was properly paid out of profits, take advice on the declaration before you pay under it (s.123(1), Companies Act 2013).

What not to do

Do not wait it out. Interest runs for the period of default, and the fine under section 127 is counted for every day the default continues.
Do not backdate. Do not change the date of declaration in minutes or records to land inside thirty days. The date is a fact.
Do not pay the wrong person. Payment goes to the registered shareholder, or to their order or banker (s.123(5), Companies Act 2013).
Do not rely on the proviso without proof. If you say a shareholder's directions could not be complied with, be able to show you told them.
Do not treat the section 127 clock and the Unpaid Dividend Account as one thing. They run side by side. Each has its own consequences.

What to do now

Next step: Draw up the list of unpaid shareholders with amounts and reasons. Pay everyone you can. Write to the rest (s.123(5) and s.127, Companies Act 2013).
Deadline: The payment window was thirty days from the date of declaration (s.127, Companies Act 2013). If it has gone, act now and do not wait for the next board meeting.
Consequence of delay: Simple interest at eighteen per cent per annum on the company, and possible imprisonment and a daily fine for directors who are knowingly a party to the default (s.127, Companies Act 2013). Separately, the transfer of the unpaid or unclaimed balance to the Unpaid Dividend Account falls due within seven days after the thirty days (s.124(1), Companies Act 2013), with its own interest and penalties.

Have a CA review your facts before you act or file.

Frequently asked questions

Does the 30-day period start on the record date or the payment date?

The Act counts from "the date of declaration" (s.127, Companies Act 2013). It does not use the record date or the payment date. Count from the day the dividend was declared, as shown in your minutes or the shareholders' resolution.

One shareholder is unpaid because of a wrong bank account. Is that an offence?

It can be. Section 127 applies where a dividend is not paid or the warrant is not posted within thirty days to "any shareholder" entitled to it. The proviso excuses a failure that was not due to any default on the part of the company, and it also covers directions that cannot be complied with if that has been communicated to the shareholder (s.127, Companies Act 2013). Your records of what you did, and when, decide how strong that position is.

Are all directors liable?

Section 127 speaks of every director who is knowingly a party to the default (s.127, Companies Act 2013). Knowledge is the test. It is not enough that someone holds the office. Whether a particular director knew is a question of fact for your CA.

Does an interim dividend count?

Yes. The Act says "dividend" includes any interim dividend (s.2(35), Companies Act 2013), so section 127 applies to it in the same way.

Is the interest compound?

No. The section says simple interest at eighteen per cent per annum during the period for which the default continues (s.127, Companies Act 2013).

What happens if no one claims the money for years?

That is the Unpaid Dividend Account and Investor Education and Protection Fund cycle under sections 124 and 125. After seven years from the transfer, unpaid money goes to the Fund (s.124(5), Companies Act 2013), and shares on which dividend has not been paid or claimed for seven consecutive years or more are transferred in the name of the Fund (s.124(6), Companies Act 2013). Our separate article on sections 123 and 124 walks through it.

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