Scenario 2:

LLL S.A.O.G is a well- established company had an issue 20 million ordinary shares of OMR 0.300 each. Apart from equity shares the company also had an issue 100,000 10% irredeemable preference shares with a par value of OMR 3.5 per share fully paid. But in the recent years it has been experiencing financial losses continuously which were OMR 100,000 ,140,000 and 200,000 during the years 2015, 2016 and 2017 respectively due to low demand for its products. Asset values of the company also falls substantially resulting in impairment of the assets resulting in exhaustion of its entire retained earnings. The balance of retained earnings at the beginning of the year 2015 was OMR 20,000.

In the years 2018 and 2019, the company made a comeback and started to earn profits. The profits in the year 2018 was OMR 1,050,000 and 2019 was OMR 1,880,000 respectively. The board of directors however decided not to pay the dividends on ordinary shares for the year 2018 instead of making profits. This means no ordinary shareholder received any dividend consistently for 4 years. The company however declared and paid final dividend of 15% on ordinary shares in 2019.

The shareholders are not satisfied with the decision of the board of directors. Shareholders are of the opinion that they have the right to receive dividend when the company is earning profits. Investing their hard earned money to reap benefits from the company has become disappointment for them. The Omani commercial law states that dividend will not be paid if the company sustains a loss which has not been fully extinguished.

Considering the following situations given above for the company you are required to answer the following:

1. Do you think shareholders can take legal action against the board of directors for not paying the dividends out of profits in year 2018? Is board of directors decisions justifiable? Also explain under which circumstances the board of directors may to refuse the dividends. (2 marks-Min 100 words)
2. Is there any impact on the irredeemable preference share dividend due to the losses of the company? Justify your answer with suitable explanation. (1 marks-Min 50 words)
3. Prepare statement of retained earnings for the year 2018 & 2019. (2 marks)