VCC Act 2018 — Section 32-33 distribution out of capital — Documents required and templates
Sections 32 and 33 of the VCC Act 2018 allow a variable capital company to make distributions to shareholders out of capital, not only out of profits, subject to a director solvency requirement, and this is one of the features that most clearly separates a VCC from an ordinary Companies Act 1967 company. This guide sets out the documents, templates and process directors and counsel need for a compliant distribution.
What Sections 32 and 33 of the VCC Act 2018 cover
Section 32 of the Variable Capital Companies Act 2018 permits a VCC to pay dividends or make other distributions out of capital as well as out of profits, which is a marked departure from the position for an ordinary Singapore company under the Companies Act 1967, where distributions are generally restricted to profits. Section 33 of the Variable Capital Companies Act 2018 then sets the safeguard for this flexibility: a distribution out of capital may only be made where the directors are satisfied, immediately after the distribution, that the VCC (or the relevant sub-fund, in an umbrella structure) will be able to pay its debts as they fall due in the ordinary course of business. This is generally described as a director solvency test, and it sits at the centre of every distribution-out-of-capital decision a VCC board makes.
The combined effect of these two sections is that a VCC fund can return capital to investors in a way that matches the economic reality of an open-ended or closed-ended fund’s life cycle, for example returning capital following a realisation event, without being constrained by the profits-only distribution rule that applies to trading companies.
Who this matters for
This is squarely a board-level decision: VCC directors bear the responsibility for forming the solvency judgement, supported by the fund manager and administrator who prepare the underlying financial information. Auditors have an interest because distribution decisions affect the financial statements and disclosures, and legal counsel is typically involved in documenting the board’s decision-making process to demonstrate that the solvency test was properly considered, not assumed. Investors receiving the distribution are less concerned with the statutory mechanics but do rely on the fund having followed a proper process, since an improper distribution can in principle expose directors, and potentially recipients, to claims.
Documents and templates required
A distribution out of capital under Sections 32 and 33 of the Variable Capital Companies Act 2018 should be supported by:
- A board resolution approving the distribution, referencing the specific sub-fund (if applicable) and the amount and form of distribution.
- A directors’ solvency statement or memorandum, recording the basis on which the board is satisfied the VCC or sub-fund will be able to meet its debts as they fall due immediately after the distribution.
- Supporting financial information from the fund administrator: current NAV, outstanding liabilities, and any known or contingent obligations relevant to the solvency assessment.
- Where the VCC is an umbrella structure, confirmation that the distribution is being funded from the correct sub-fund’s own assets, consistent with the segregation regime elsewhere in the VCC Act 2018.
- Investor notice or distribution advice, setting out the amount per share and the record and payment dates.
- Updated financial statement disclosures reflecting the distribution and its capital, as opposed to profit, character.
Cost and timeline
Legal review and documentation of a distribution-out-of-capital process, including drafting the board resolution and solvency statement template for future use, typically costs S$1,500 to S$4,000 for the first instance, with subsequent distributions generally lower in cost once the templates exist and mainly require updating figures and board sign-off. The solvency assessment itself, drawing on administrator-prepared NAV and liability information, is usually completed within 1 to 2 weeks of a distribution being proposed, with the board resolution and investor notice following within a further few business days. Overall, a distribution-out-of-capital cycle, from proposal to payment, typically takes 2 to 4 weeks.
Step-by-step process
- The fund manager or administrator proposes a distribution amount, usually tied to a realisation event or scheduled return of capital.
- The administrator prepares current NAV, liability and contingent-obligation information for the relevant sub-fund or the VCC as a whole.
- The directors review this information and form the solvency judgement required by Section 33 of the Variable Capital Companies Act 2018.
- The board passes a resolution approving the distribution and records the solvency statement in the board minutes or a separate memorandum.
- The administrator processes the distribution and issues investor notices confirming the amount, record date and payment date.
- The distribution is reflected in the VCC’s or sub-fund’s financial statements, with appropriate disclosure of its capital character.
- Documentation of the solvency assessment is retained as part of the audit trail for the annual audit.
Worked example
Consider a private credit VCC sub-fund that has just realised a loan investment ahead of schedule, generating cash the manager wishes to return to investors rather than immediately redeploy. The manager proposes a distribution of S$5,000,000 to the sub-fund’s investors. The administrator prepares a current statement of the sub-fund’s assets and liabilities, including outstanding management fees payable, any drawn but unfunded financing facility, and any redemption requests already received but not yet paid. The directors review this information against the proposed distribution amount and satisfy themselves, under Section 33 of the Variable Capital Companies Act 2018, that the sub-fund will still be able to pay its debts as they fall due immediately after the S$5,000,000 leaves the sub-fund. This assessment, and the figures relied upon, are recorded in a written solvency memorandum appended to the board resolution approving the distribution. Investors then receive a distribution notice that describes the payment as a distribution out of capital, consistent with Section 32 of the Variable Capital Companies Act 2018, rather than a dividend out of profits, so that the tax and accounting character of the payment is clear from the outset.
Board governance and documentation practice
Because Sections 32 and 33 place the solvency judgement squarely on the directors rather than requiring an external sanction process, the quality of the board’s documentation is what will be examined if a distribution is later questioned, whether by an auditor, a liquidator in a subsequent insolvency, or an aggrieved investor. Good practice is for the board to adopt a standard solvency-statement template in advance, so that every distribution decision follows the same disciplined process: current NAV, a schedule of known and contingent liabilities, confirmation of the source sub-fund’s segregated asset position, and an explicit statement of the directors’ conclusion. Boards should be cautious about approving distributions based on projected or stale valuations, particularly for sub-funds holding illiquid assets where NAV can move materially between valuation points. Where a distribution is unusually large relative to the sub-fund’s asset base, or coincides with known upcoming redemption requests, the board should consider seeking an updated solvency assessment closer to the actual payment date rather than relying solely on the figures used when the distribution was first proposed.
Common mistakes and gotchas
The most significant risk is treating the Section 33 solvency test as a formality rather than a genuine assessment, for example approving a distribution based on stale NAV figures or without considering known upcoming liabilities such as redemption requests already received but not yet paid. In umbrella structures, a further common mistake is funding a distribution from the umbrella’s general assets rather than the specific sub-fund’s own assets, which cuts across the segregation principle that underpins the whole umbrella structure. Boards also sometimes fail to document the solvency statement in writing at the time of the decision, which becomes a real problem if the distribution is later questioned, since an undocumented judgement is difficult to defend after the fact. Finally, some VCCs do not clearly disclose in investor communications that a distribution is being made out of capital rather than profit, which can create investor relations issues even where the underlying decision was properly made.
How this interacts with the wider VCC framework
The distribution-out-of-capital mechanic depends on, and should be read together with, the variable capital and redemption mechanic under Section 24 of the Variable Capital Companies Act 2018 and the sub-fund segregation regime, since both redemptions and distributions ultimately draw on the same pool of sub-fund assets and need to be sequenced and assessed together for solvency purposes. Directors should also bear in mind that the general directors’ duties applied to VCCs under the Companies Act 1967 continue to inform how the Section 33 solvency judgement should be approached, in the sense that it must be a genuine, informed judgement rather than a nominal sign-off.
Regulatory and audit considerations
Because a distribution out of capital changes the composition of a VCC’s or sub-fund’s balance sheet in a way a profit distribution does not, auditors pay particular attention to how such distributions are disclosed in the financial statements, including whether investors were clearly informed of the capital character of the payment. MAS does not need to approve individual distribution decisions, but the fund manager, if licensed or registered, remains subject to its general obligation to manage the fund in a manner consistent with its offering documents and with fair treatment of investors, so a pattern of distributions that erodes the fund’s asset base without clear investor communication could attract scrutiny of the manager’s conduct more broadly. From a practical audit perspective, retaining the directors’ solvency memorandum, the administrator’s supporting financial information, and the investor distribution notice together as a single file for each distribution is the most efficient way to satisfy audit queries and to demonstrate, if ever challenged, that the Section 33 test was genuinely applied rather than assumed.
FAQs
Can a VCC pay dividends out of capital rather than only out of profits?
Yes. Section 32 of the VCC Act 2018 specifically permits this, unlike the position for an ordinary Companies Act 1967 company, subject to the director solvency requirement in Section 33.
What is the solvency test directors must apply before a distribution?
Under Section 33 of the VCC Act 2018, directors must be satisfied that immediately after the distribution, the VCC or relevant sub-fund will still be able to pay its debts as they fall due in the ordinary course of business.
Does the solvency test apply at the sub-fund level or the whole VCC level?
For an umbrella VCC, the assessment is generally made by reference to the specific sub-fund making the distribution, consistent with the segregation of sub-fund assets and liabilities elsewhere in the VCC Act 2018.
Should the directors’ solvency judgement be documented in writing?
Yes. A written solvency statement or memorandum, prepared at the time of the decision, is the primary evidence that the board properly considered the test rather than treating it as a formality.
How long does a typical distribution-out-of-capital process take?
From proposal to payment, a distribution cycle typically takes around 2 to 4 weeks, depending on how quickly the administrator can prepare supporting NAV and liability information.
Related guides
For the tax treatment often relevant to distributions from offshore-facing structures, see our guide to the Section 13D offshore fund scheme. If you are setting up the manager entity that will administer distribution processes, see our guide to Singapore Pte Ltd company registration for foreigners. For the parallel eligibility checklist on this same statutory provision, see VCC Act 2018 — Section 32-33 distribution out of capital — Eligibility and requirements checklist on this site.
For the statutory text itself, see the Variable Capital Companies Act 2018 on Singapore Statutes Online. For registration matters, see ACRA, and for MAS’s regulatory explainer on the VCC framework, see the MAS explainer on VCCs.
Need help with this? Call, SMS or WhatsApp +65 8501 7133, or email hello@rafflescorporateservices.com. Raffles Corporate Services works with a panel of corporate and employment law firms; this article is general information, not legal advice.