T-Beverages Ltd

has just wrapped up its

financial year, and the board is feeling generous. Even though the company’s

profits are lower than expected, Hunk (the CEO) suggests paying a dividend to

keep shareholders happy — especially with the next AGM coming up.

However, when you check the financial records, you noticed something

odd:

• The company’s total assets are $500,000.
• Its total liabilities are $490,000.

• If the proposed dividend of $50,000 is paid,

  liabilities will exceed assets.

You raise your concerns with Claire (the Chairperson), who

shrugs and says, "

You’re not convinced.

Required:

1. What

   are the legal requirements that must be met before a company can pay a

   dividend?

2. Based

   on your answer above, should the company pay dividends to the

   shareholders?

3. What

   are the potential legal consequences of paying dividends in this instance?

(1 + 1.5 + 1.5 = 4 marks)