257Topic list Syllabus reference
1 Capital maintenance E3(a)
2 Reduction of share capital E3(a)
3 Distributing dividends e E3(b)Capital
maintenance and
dividend law
Introduction
The capital which a limited company obtains from its members as
consideration for their shares is sometimes called 'the creditors' buffer'. No
one can prevent an unsuccessful company from losing its capital by trading at
a loss. However, whatever capital the company does have must be held for the
payment of the company's debts and may not be returned to members except
under procedures which safeguard the interest of creditors. That is the price
which members of a limited company are required to pay for the protection of
limited liability. This principle has been developed in a number of detailed
applications.
Capital may only be distributed to members under the formal procedure of
a reduction of share capital or a winding up of the company.
Dividends may only be paid out of distributable profits.