# Dividends and the Solvency Test: When a Sdn Bhd Can Actually Pay

> A Malaysian company may only distribute out of profits and only if it is solvent — two separate tests under sections 131 and 132 of the Companies Act 2016, with personal liability and a five-year prison term for directors who authorise an improper distribution.

- Category: company-secretary
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/company-secretary/dividends-and-solvency

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A profitable Sdn Bhd with RM800,000 of retained earnings pays its two shareholders a
RM600,000 dividend in December. In March the main customer collapses, the company
cannot meet its supplier terms, and by August it is being wound up.

The directors' problem is not that they were unlucky. It is s.132(5), which makes
wilfully authorising an improper distribution punishable by up to five years'
imprisonment, and s.133(2), which makes them personally liable to the company for the
excess. Retained earnings were never the whole test.

## Two tests, both of which must pass

Section 131(1) is one sentence and it does all the work:

> Subject to section 132, a company may only make a distribution to the shareholders
> out of profits of the company available if the company is solvent.

Read it as two conditions joined by "and":

1. **Out of profits available.** The distribution must be sourced from distributable
   profits, not from capital.
2. **Only if the company is solvent.** A separate, forward-looking judgment.

Section 131(2) makes contravention an offence for the company, every officer, and any
other person or individual, with imprisonment up to **five years** or a fine up to
**RM3 million** or both.

Profitable-on-paper is the failure mode. A company can satisfy test one comfortably
and fail test two badly, and the accounts will not tell you — retained earnings are
historic, and s.132(3) asks about the next twelve months.

## The solvency test for dividends is narrower than you think

This is where careful reading pays. The Act contains **two different solvency tests**,
and the dividend one is the lighter of the two.

| | **Dividends** — s.132(3) | **Capital reduction, buyback, financial assistance** — s.112(1) |
| --- | --- | --- |
| Cash-flow limb | Able to pay debts as they become due within **12 months** after the distribution | Able to pay debts as they become due during the 12 months after the transaction |
| No-grounds limb | — | No ground on which the company could be found unable to pay its debts immediately after |
| Balance-sheet limb | — | **Assets exceed liabilities** at the date of the transaction |
| Formal statement | Not required | Required — s.113, signed by all directors for a reduction |

Section 132(3) has **only** the cash-flow limb:

> For the purposes of this section, the company is regarded as solvent if the company
> is able to pay its debts as and when the debts become due within twelve months
> immediately after the distribution is made.

There is no statutory requirement for a signed solvency statement before a dividend,
and no balance-sheet test. That makes the dividend route procedurally lighter — and,
because the directors' judgment is undocumented, evidentially harder to defend later.

## Who authorises a distribution

Section 132(1): before a distribution is made, it **shall be authorised by the
directors** of the company.

This is a real change from the pre-2017 habit of members declaring a final dividend at
the AGM, and it survives in a lot of Malaysian templates. Under the Act, the decision
is the board's. Section 132(2) gives the board wide discretion on timing and amount —
subject to the condition:

> …if the directors are satisfied that the company will be solvent immediately after
> the distribution is made.

A constitution may impose an additional members' step, and many inherited Companies Act
1965 articles do. That does not displace s.132(1); it adds to it.

## The duty to stop a distribution already authorised

Section 132(4) is the provision almost nobody in the Malaysian market writes about,
and it is the one that turns a bad quarter into personal exposure:

> If, after a distribution is authorized and before it is made, the directors cease to
> be satisfied on reasonable grounds that the company will be solvent immediately after
> the distribution is made, the directors shall take all necessary steps to **prevent
> the distribution from being made**.

The obligation runs continuously between authorisation and payment. Where a board
declares a dividend in November for payment in February and receives a material adverse
development in December, s.132(4) requires them to act on it. Paying anyway is not
inertia — it is a breach of a positive statutory duty, and it feeds directly into
s.132(5).

Note also the words "on reasonable grounds". The test is not whether the directors
subjectively remained comfortable; it is whether reasonable grounds for satisfaction
persisted.

## What "profits available" means in practice

The Act does not define "profits available for distribution", which leaves the concept
to be filled by accounting standards and general principle. Three practical
observations:

- **Retained earnings are the starting point, not the answer.** The figure must be
  distributable, so unrealised revaluation surpluses and amounts required to be held as
  reserves do not qualify simply because they sit in equity.
- **Section 244(7) matters.** Approved accounting standards prevail over the Act where
  they conflict, so the measurement of profit follows MFRS or MPERS as applicable.
- **Interim dividends rest on management accounts.** Nothing prohibits that, but a
  director relying on unaudited figures is relying on them for the purposes of a
  s.132(2) satisfaction, and s.215 governs when reliance on information from others is
  reasonable.

Distributions of capital rather than profit go through a different door entirely — a
reduction of share capital under s.115, with its own procedure, timetable and
statutory solvency statement.

## Liability: criminal, personal and recoverable

**Criminal.** Section 132(5) makes every director or officer who **wilfully** pays,
permits to be paid, or authorises the payment of any improper or unlawful distribution
liable on conviction to imprisonment up to **five years**, or a fine up to **RM3
million**, or both. Section 131(2) is in the same terms for the s.131 breach.

**Personal, to the company.** Section 133(2) makes every director or manager who
wilfully pays or permits payment of any dividend in contravention of s.131 or s.132,
**which he knows from his knowledge is not profits**, liable to the company to the
extent of the amount exceeding what could properly have been distributed. Section
133(3) allows a director who has paid the whole amount to recover contribution from
any other person liable who directed or consented to the payment.

Section 133(4) contains a small mercy: the liability under s.133 does **not** extend or
pass to executors, administrators or the estate on the person's death.

**Recovery from shareholders.** Section 133(1) allows the company to recover from a
shareholder any amount of distribution paid which exceeds what could properly have been
made — **unless** the shareholder both received it in good faith **and** had no
knowledge that the company did not satisfy the s.132(3) solvency test. Both limbs are
required.

For an owner-managed Sdn Bhd this is close to circular. The shareholder who received
the dividend is usually the director who authorised it, and the knowledge that defeats
the s.133(1) defence is the same knowledge that establishes wilfulness under s.132(5).
There is nowhere to stand.

## Where this sits alongside directors' duties

An improper distribution is rarely only a s.131 problem. Section 213(1) requires a
director to exercise powers for a proper purpose and in good faith in the best interest
of the company, and s.213(2) requires reasonable care, skill and diligence. Paying out
cash the company needs to trade engages both.

Section 214 provides the business judgment rule, and s.215 governs reliance on
information supplied by officers, experts and other directors. A board that took proper
financial advice, documented the twelve-month cash-flow assessment and minuted its
reasoning is in a materially better position than one that approved a round number.

Section 210 extends ss.213 to 218 to the chief executive officer, chief financial
officer and chief operating officer and to anyone primarily responsible for the
management of the company, whether or not a director. The finance director who prepared
the distributable-profits figure is not outside the frame because they are not on the
board.

Board minutes are the only durable record of a s.132(2) satisfaction. Under paragraph 12
of the Third Schedule, a director present at the meeting is presumed to have agreed to
and voted in favour of the resolution unless he expressly dissents — so a director with
reservations about the dividend must say so, at the meeting, on the record.

## The tax layer, briefly

Malaysia operates a single-tier system: tax paid by the company is final, and dividends
paid out of it are exempt in the shareholder's hands.

Since YA2025, however, Schedule 1 Part XXII of the Income Tax Act 1967 imposes a **2%
tax on individual dividend income exceeding RM100,000**, with rules gazetted as
P.U.(A) 148/2025 on 7 May 2025. That changes the arithmetic on large owner-manager
distributions, and it is a separate question from whether the distribution is lawful
under the Companies Act.

## Common mistakes

**Treating retained earnings as the whole test.** Section 131(1) requires available
profits **and** solvency. The second test looks forward twelve months.

**Applying the s.112 solvency test to a dividend.** Section 132(3) has only the
cash-flow limb. Using the stricter test is not wrong in substance, but citing it as the
law is.

**Having members declare the dividend.** Section 132(1) puts authorisation with the
directors. Check the constitution for an added members' step, but the board decision is
the statutory one.

**Ignoring s.132(4) after authorisation.** The duty runs until the money moves.

**Documenting nothing.** No solvency statement is required, which means the board
minute is the only evidence of the s.132(2) satisfaction. Record the twelve-month
assessment and what it relied on.

**Assuming a shareholder can always keep the money.** Section 133(1) requires good
faith **and** absence of knowledge. In an owner-managed company both usually fail.

**Paying out of capital and calling it a dividend.** If the money is not from
distributable profits, the transaction is a capital reduction and belongs under s.115.

## What's next

Before the next distribution, put two things in the board pack: the distributable
profits figure with its basis, and a twelve-month cash-flow assessment covering the
period after payment. Minute both, and minute the conclusion.

For returning capital rather than profits, and the stricter test that governs it, see
`capital-reduction`. For the duties framework behind the decision, see
`directors-duties`. For the tax treatment of what the shareholder receives, see
`corporate-tax-rates`.

## Sources

- Companies Act 2016 (Act 777), reprint as at 1 August 2022 — ss.112, 131–133 — https://www.ssm.com.my/Pages/Legal_Framework/Document/Companies%20Act%202016_Akta%20777_BI%20(1.8.2022).pdf (SSM)
- Companies Act 2016 (Act 777) — ss.213–218 directors' duties — https://www.ssm.com.my/Pages/Legal_Framework/Document/Companies%20Act%202016_Akta%20777_BI%20(1.8.2022).pdf (SSM)
- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — Schedule 1 Part XXII — https://www.hasil.gov.my/wp-content/uploads/20240521-akta-cukai-pendapatan-1967-akta-53.pdf (LHDN)

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