Dividends: Legal Duties Of NZ Companies And Directors

If your company has had a good year, it’s natural to start thinking about paying dividends to shareholders.

But before you transfer money out of the business, it’s important to understand the legal obligations that apply to dividends in New Zealand. Dividends aren’t just a “nice-to-have” reward for shareholders - they’re a formal company decision that directors are responsible for getting right.

The good news is that once you understand the rules (and have the right documents in place), declaring dividends can be straightforward and help you manage shareholder expectations and business growth.

What Is A Dividend (And Why Does It Come With Legal Obligations)?

A dividend is a distribution of value by a company to its shareholders, usually in cash. In plain terms: it’s how shareholders can take a return from owning shares, without needing to sell those shares.

For many small businesses, dividends come up when:

• the company has made a profit and has surplus cash;
• owners want to extract money from the company in a shareholder capacity (not as wages);
• there are multiple shareholders and you want a clear, fair process for distributions;
• you’re planning for tax, reinvestment, or succession.

Dividends come with legal obligations because:

• they affect the company’s ability to pay suppliers and creditors;
• they can shift value between different shareholder groups (especially if there are different share classes);
• they are decisions made by directors, who have duties to the company; and
• there are specific solvency and procedural requirements under the Companies Act 1993.

So even if you and your co-founder are the only shareholders, dividends should be treated as a proper company decision - not an informal transfer.

What Are The Key Legal Obligations For Dividends Under The Companies Act 1993?

In New Zealand, the legal framework for dividends sits primarily under the Companies Act 1993. While the Act is detailed, the core idea is simple: a company should only pay dividends if it can afford to do so and remains solvent.

The Solvency Test (The Big One)

Before a dividend is paid, the board must be satisfied that the company will pass the solvency test immediately after the distribution.

The solvency test has two limbs:

• Liquidity test: can the company pay its debts as they fall due in the normal course of business?
• Balance sheet test: does the company’s total assets exceed its total liabilities (including contingent liabilities)?

This matters because dividends reduce company assets (usually cash). If you pay a dividend and the company can’t meet obligations afterwards, that can create serious risk for both the business and directors.

Directors Must Sign A Solvency Certificate When Authorising A Dividend

When the board authorises a dividend (as a type of “distribution” under the Companies Act 1993), the directors who vote in favour are generally required to sign a solvency certificate. This is not just paperwork - it’s a formal statement that the directors have reasonable grounds to be satisfied the solvency test is met immediately after the distribution.

If your company is small, this can feel like overkill, but it’s a key part of complying with dividend requirements and creating a clear record that the decision was made properly.

The Dividend Must Be Properly Authorised

Dividends are usually declared by the board (and sometimes there can be shareholder involvement depending on your constitution and share rights).

What “properly authorised” means in practice is:

• the board makes a resolution declaring the dividend;
• the company records the decision (minutes/resolutions); and
• the dividend is paid in accordance with shareholder rights (for example, proportionate to shareholdings unless different rights apply).

If you’re relying on rules in your constitution (or you’ve modified the default rules in the Act), you’ll want to check those carefully. A tailored Company Constitution can be particularly important where there are different share classes, different dividend rights, or special decision-making thresholds.

Shareholder Rights And Fairness Still Matter

Even if your company is solvent, dividends must be paid according to the rights attached to shares.

For example:

• If two shareholders hold ordinary shares in equal proportions, they’d usually expect dividends to be paid equally.
• If there are preference shares or separate classes, the “who gets what” can be different.
• If you pay one shareholder but not another (without a proper legal basis), you could trigger disputes and claims of unfair treatment.

This is one reason many small businesses put clear rules in a Shareholders Agreement, especially if the company has multiple owners or different levels of involvement in the business.

What Are Directors Personally Responsible For When Declaring Dividends?

Directors have duties to act in the best interests of the company and to exercise care and diligence. When it comes to dividends, those duties get very practical, very quickly.

In a small business, you might be a director and shareholder, so it can feel like “it’s our money anyway”. But legally, directors must still make the dividend decision properly and with the company’s interests in mind.

Making A Proper Decision (Not A Gut Call)

To comply with their dividend-related duties, directors should be able to show they relied on appropriate financial information. Depending on the business, that might include:

• up-to-date management accounts;
• cash flow forecasts (especially if cash is tight or seasonal);
• current liabilities (PAYE, GST, supplier invoices, loans);
• any upcoming large expenses or contracts;
• contingent risks (like a potential dispute, warranty claim, or IRD audit).

This doesn’t mean you need an audit every time - but you do need a defensible basis for saying “yes, we can afford this dividend”.

Risk Of Liability If The Company Was Not Solvent

If directors approve a dividend when the company does not meet the solvency test (or they didn’t properly consider it), the consequences can be serious. Depending on the facts, this could involve:

• directors being required to repay money;
• shareholders being required to repay money in some cases;
• breach of directors’ duties allegations;
• issues during insolvency or liquidation if the business later fails.

It’s not about being pessimistic - it’s about making sure you’re protected from day one, and that a “good year” doesn’t turn into a compliance headache later.

Getting The Paper Trail Right

Many disputes around dividends aren’t about whether the company could afford it - they’re about what was decided, when it was decided, and whether it was decided properly.

At a minimum, you should maintain:

• a board resolution declaring the dividend;
• a solvency certificate (where required);
• clear records showing how the dividend amount was calculated and allocated;
• evidence of payment (bank records); and
• updated accounting/tax records (to ensure correct reporting).

Depending on your company’s governance, you may also use formal company resolutions. For example, a Directors Resolution is often a clean way to document decisions, especially where you want clarity for shareholders, accountants, or future buyers.

How Do Dividends Work In Real Small Business Scenarios?

In practice, dividends often come up alongside other ways of paying business owners. Each approach has different legal, tax, and practical implications.

Here are common scenarios we see in small businesses.

Scenario 1: Two Founders Want To “Take Some Profit Out”

Let’s say you have two shareholders who each own 50%. The company has had a profitable year, but you’re also planning to hire staff and invest in marketing.

In this situation, paying dividends can work well - but you’ll still want to:

• confirm your upcoming cash needs (so you don’t drain working capital);
• ensure you pass the solvency test after the dividend;
• record the decision formally (even if you’re both directors);
• make sure payments match share rights (50/50 unless otherwise agreed).

If one founder works full-time in the business and the other doesn’t, a dividend might not feel “fair” as a way to compensate work. That’s where a mix of salary, shareholder salary, or other arrangements may come into play - and it’s worth documenting expectations in a Shareholders Agreement so you don’t end up in a deadlock later.

Scenario 2: Different Shareholders, Different Expectations

If you have outside investors, family shareholders, or different share classes, dividends can become sensitive.

Questions that come up include:

• Are dividends expected annually, or only when the company chooses?
• Do some shares have preferential dividend rights?
• Does a shareholder need to vote to approve dividends?
• Can the business reinvest profits instead of paying them out?

This is where solid governance documents matter. A tailored Constitution and Shareholders Agreement can reduce the risk of misunderstandings and disputes.

Scenario 3: Paying Dividends While The Company Has Debt

Having debt doesn’t automatically stop dividends. But it does raise the stakes.

Before paying dividends, check:

• loan covenants (some lenders restrict distributions);
• security interests and finance arrangements;
• your cash flow timing (for example, seasonal revenue);
• whether the dividend would leave the company unable to meet repayments.

Even where a lender allows dividends, directors still need to meet the solvency test and their duties.

What Documents And Company Processes Help You Stay Compliant?

If you want to meet dividend requirements consistently (and avoid “we’ll figure it out later” decisions), it helps to have the right legal and governance foundations in place.

A Clear Constitution And Shareholder Rules

Some companies rely on the default rules in the Companies Act. Others adopt a constitution to tailor how decisions are made, including dividend processes.

A good constitution can help clarify:

• how dividends are authorised;
• different rights attached to share classes;
• voting thresholds for certain decisions;
• director powers and decision-making processes.

If your company is growing or has (or plans to have) multiple shareholders, putting a Company Constitution in place can save a lot of stress later.

A Shareholders Agreement For Commercial Clarity

While a constitution sets internal rules under company law, a shareholders agreement often deals with practical “relationship” issues between shareholders.

This can include:

• whether the company aims to pay dividends regularly;
• how profits are allocated between reinvestment and distributions;
• what happens if shareholders disagree about paying dividends;
• how to handle shareholders who don’t work in the business;
• exit and transfer rights (so dividends aren’t the only “return” pathway).

This is why a Shareholders Agreement is often one of the most practical documents for small businesses with more than one owner.

Board Resolutions And Good Record-Keeping

Even if you’re a sole director, you still want to document key decisions. This becomes especially important if:

• you ever sell the business;
• you bring in investors;
• the company is audited or reviewed by a lender;
• there’s a shareholder disagreement;
• the company runs into financial difficulty later.

If you want a cleaner governance process, formalising decisions with a Directors Resolution can help keep everything consistent and defensible.

Employment And Payment Structures (So Dividends Aren’t Misused)

Dividends are not a substitute for wages for employees. If you have people working in the business, make sure the payment arrangements match the legal relationship.

If someone is genuinely an employee (even if they’re also a shareholder), you’ll generally want a proper Employment Contract in place so salary, duties, leave, and termination are clear. That way, dividends remain what they’re intended to be: a return on share ownership.

Tax Treatment (Get Advice Before You Declare)

Dividends also have tax consequences, and the “right” approach can depend on your share structure and shareholder profile. For example, dividends may involve imputation credits and/or withholding tax obligations (such as resident withholding tax or non-resident withholding tax). Your accountant or tax adviser can help confirm what applies before you declare and pay a dividend.

Key Takeaways

• Dividends come with strict legal requirements in New Zealand, including the need to comply with the Companies Act 1993 and meet the solvency test.
• Directors must be satisfied the company can pay its debts and that assets exceed liabilities immediately after the dividend is paid.
• Good intentions aren’t enough - directors should rely on up-to-date financial information and keep a clear record of the decision-making process.
• Dividends must be paid according to share rights, which is why a tailored Company Constitution and Shareholders Agreement can be crucial as your business grows.
• Paperwork matters (board resolutions, solvency certificates, and proper records) because it helps protect the company and directors if questions arise later.
• Dividends shouldn’t be used as a workaround for employee payments - make sure your employment arrangements are documented properly.
• Tax can be complex - get accounting/tax advice before declaring dividends to ensure the right credits and withholding are handled.

If you’d like help understanding your company’s dividend obligations, setting up the right governance documents, or making sure dividend decisions are made correctly, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.