Unlawful Dividends in Singapore: When Directors Must Repay Them

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In an owner-managed company, dividends are often the way the founders pay themselves. That works well while the business is profitable. The trouble starts when dividends are paid from cash rather than profits, or when the company is already in difficulty, perhaps facing a lawsuit or falling behind with suppliers. If the company is later wound up, the liquidator will look closely at every dividend paid in the years before.

Singapore law attacks improper dividends from two directions. Section 403 of the Companies Act 1967 says no dividend may be paid except out of profits. Separately, directors owe a fiduciary duty to consider the interests of creditors when the company is insolvent or close to it. The Court of Appeal confirmed in 2024 that these are distinct, and that a director can be ordered to repay dividends under the second even where the first is not relied on.

This article explains when a dividend is unlawful, who can be made to pay it back, and what the board should document before any dividend is declared.

The basic rule: dividends only out of profits

Section 403(1) of the Companies Act 1967 states that no dividend is payable to the shareholders of any company except out of profits. Section 403(5) extends “dividend” to include bonuses and payments by way of bonus. Related rules in section 403(1A) to (1C) prevent profits applied to share buy-backs, and gains on disposals of treasury shares, from being paid out as dividends.

The same rule appears in most constitutions. Under the Model Constitution in the First Schedule to the Companies (Model Constitutions) Regulations 2015:

• regulation 103 lets the company in general meeting declare dividends, but not more than the amount the directors recommend;
• regulation 104 lets the directors pay interim dividends that appear to them to be justified by the profits of the company; and
• regulation 105 says no dividend may be paid otherwise than out of profits.

The Companies Act does not define “profits” in section 403. In practice, the board looks at the company’s accounts to see whether there are distributable profits, and the question is often whether accumulated losses from earlier years have been taken into account. For the mechanics of declaring a dividend properly, see our guide to dividend declarations under section 403.

Consequences under section 403

Section 403(2) applies to every director or chief executive officer who wilfully pays, or permits to be paid, a dividend in contravention of the section. That person:

• is guilty of an offence, liable on conviction to a fine not exceeding $5,000 or imprisonment for a term not exceeding 12 months; and
• is also liable to the company’s creditors for the debts due to them, to the extent by which the dividends paid exceeded the profits. That amount can be recovered by the creditors, or by the liquidator suing on behalf of the creditors.

Two further points matter for boards with more than one director. Under section 403(3), a director or CEO who has paid the whole amount may recover contribution from any other person liable who directed or consented to the payment. Under section 403(4), this statutory liability does not pass to a director’s estate on death.

The word “wilfully” is important. Section 403(2) is aimed at directors who knowingly allow a dividend without profits, not at a genuine accounting error. That is one reason the more common claim today is the one described next.

The creditor duty: dividends paid when the company is in difficulty

Foo Kian Beng v OP3 International Pte Ltd

In Foo Kian Beng v OP3 International Pte Ltd (in liquidation) [2024] SGCA 10 (“OP3“), the sole director and shareholder of an interior fit-out company caused it to pay him dividends of $2.8 million and repay shareholder loans of about $820,000 between 2015 and 2017, while a customer’s lawsuit against the company over defective works was pending. The company was found liable in that suit, could not pay, and was wound up in 2020. The liquidator sued the director.

The High Court found the company balance-sheet insolvent at 31 December 2016 and 2017, and held that the director breached his duty by authorising a $500,000 dividend and a further payment in that period. He was ordered to pay the company $1,182,394. The Court of Appeal, sitting as a five-judge bench, dismissed his appeal.

What the Court of Appeal decided

The Court of Appeal held that the duty to consider creditors’ interests (the “Creditor Duty“) is part of a director’s fiduciary duty to act in the company’s best interests, and is owed to the company, not to creditors directly. It set out a three-stage approach based on the company’s objective financial position:

The court also held that section 403(1) and the Creditor Duty overlap but are distinct, so section 403 is not an exclusive code for dividends. A liquidator can bring a claim for breach of the Creditor Duty in the company’s name even if the dividend may also have breached section 403. The court further held that the time limits for clawing back unfair preferences do not limit a claim for breach of the Creditor Duty.

Relief for honest directors

Section 391 of the Companies Act allows the court to relieve an officer wholly or partly from liability for breach of duty if the officer acted honestly and reasonably and ought fairly to be excused. In OP3, relief was refused, and the Court of Appeal said such relief will be granted only in few cases, with the burden on the director.

Other ways a liquidator can attack a dividend

A liquidator may also consider the insolvency avoidance provisions in the Insolvency, Restructuring and Dissolution Act 2018 (IRDA). Under section 224, the court may reverse a transaction at an undervalue, which includes a transaction for which the company receives no consideration, made within three years before the winding up (s 226(1)(a)). Under section 226(2), the company must have been unable to pay its debts at the time, or have become unable to do so as a result. Where the transaction is with a person connected with the company, that insolvency requirement is presumed unless the contrary is shown (s 226(3)). Whether a particular dividend falls within these sections is a question for legal advice, but directors should assume a liquidator will ask.

Repayments of directors’ and shareholders’ own loans in the run-up to insolvency raise similar issues; see our article on shareholder and director loans in liquidation and our guide to voidable transactions in a winding up.

Warning signs before declaring a dividend

• The latest accounts show accumulated losses, or the “profit” is mainly an unrealised revaluation.
• The company is defending a significant claim, or has received a letter of demand or statutory demand it cannot meet.
• Creditors are being paid late, or tax and CPF payments are in arrears.
• The dividend will leave the company dependent on new borrowing or on the shareholders lending the money back.
• Management accounts are months out of date, so nobody knows the current position.

Any one of these does not make a dividend unlawful, but it is a signal that the board should look harder at solvency and record its reasoning. Our wider guide on when a director pays personally covers related exposures.

What the company should do

• Board minutes. Before recommending a final dividend or paying an interim dividend, minute that the directors have reviewed up-to-date accounts, identified distributable profits, considered pending claims and contingent liabilities, and are satisfied the company can pay its debts as they fall due after the payment.
• Supporting papers. Keep the management accounts, cash flow forecast and any legal assessment of pending claims with the minutes. In OP3, the court examined the company’s financial position at the date of each payment.
• Member resolutions. A final dividend should be declared by the members (by ordinary resolution or written resolution) within the amount the directors recommend, if the constitution follows regulation 103.
• Registers and records. Record the dividend per share and the payment date against each member in the company’s records, and issue dividend vouchers.
• Accounts and ACRA. Ensure the dividend is correctly shown in the financial statements and that the annual return is filed with ACRA on time. Information on annual filing is on the ACRA website.
• If a dividend may have been unlawful. Take advice promptly. Options may include the recipients repaying the amount voluntarily and the board documenting that correction.

Frequently asked questions

Can a company pay a dividend if it has cash but no profits?

No. Section 403(1) of the Companies Act allows dividends only out of profits, regardless of the bank balance. Paying a dividend from capital or borrowed money is precisely what the rule prevents.

I was the only director and only shareholder. Who could complain?

While the company is solvent, usually nobody. If the company later becomes insolvent and is wound up, the liquidator can sue in the company’s name for breach of the Creditor Duty, as happened in OP3, and creditors or the liquidator can pursue section 403(2) liability where it applies.

Is the criminal offence common?

Section 403(2) requires the director to have wilfully paid or permitted the dividend, so it targets deliberate conduct. The maximum penalty is a fine of $5,000 or 12 months’ imprisonment. The civil consequences are usually far larger.

Does it help that the dividend was paid years before the winding up?

Not necessarily. The Court of Appeal in OP3 held that the clawback periods for unfair preferences do not limit a claim for breach of the Creditor Duty. What matters is the company’s financial position at the time the dividend was paid.

Can a director be excused?

Section 391 of the Companies Act allows the court to grant relief to an officer who acted honestly and reasonably and ought fairly to be excused. The Court of Appeal has said this will be granted only in few cases, and the director bears the burden of showing it should apply.

Need a lawyer?

This article is general information about Singapore law for companies, directors and shareholders. It is not legal advice, and it does not take account of your circumstances. Raffles Corporate Services Pte Ltd is a corporate service provider, not a law practice, and does not give legal advice.

If your company paid dividends that a liquidator or creditor is now questioning, or you are a director unsure whether a proposed dividend is safe, we can introduce you to an experienced Singapore law firm that handles directors’ duties, insolvency and liquidator claims. Tell us briefly what has happened and we will connect you.

Email: [email protected]
WhatsApp: +65 8501 7133 or +65 9018 0072

We can also take care of the corporate side for you: board and shareholder resolutions, register updates and ACRA filings.

Conclusion

A dividend is lawful only if it comes out of profits, and even then a director must look at whether the company can afford it. The OP3 decision shows that a sole director who pays himself dividends while a significant claim is pending can be ordered to repay them years later. The protection is simple: up-to-date accounts, a candid look at solvency and contingent claims, and minutes that show the board did that work. Where a director or shareholder has lost capacity, the same discipline applies to dividends paid on their shares; see our article on when a director loses mental capacity. For help with dividend resolutions, registers and annual filings, contact Raffles Corporate Services.

The Editorial Team, Raffles Corporate Services