ACCA F4 - Corp and Business Law (ENG)

258 17: Capital maintenance and dividend law  Part E Capital and the financing of companies

Study guide

Intellectual level

E Capital and the financing of companies^

3 Capital maintenance and dividend law

(a) Explain the doctrine of capital maintenance and capital reduction 2

(b) Explain the rules governing the distribution of dividends in both private and

public companies

2

Exam guide

Capital maintenance can be a difficult area. The different components could all be examined separately in

multiple choice questions, or as part of a scenario question.

1 Capital maintenance

The rules which dictate how a company is to manage and maintain its capital exist to maintain the delicate

balance between the members' enjoyment of limited liability and the creditors' requirements that the

company shall remain able to pay its debts.

Capital maintenance is a fundamental principle of company law, that limited companies should not be

allowed to make payments out of capital to the detriment of company creditors. Therefore the Companies

Act contains many examples of control upon capital payments. These include provisions restricting

dividend payments, and capital reduction schemes.

The rules affecting the possible threats to capital are complicated in certain areas. However, provided you

know the rules, questions on capital maintenance tend to be straightforward.

2 Reduction of share capital

Reduction of capital can be achieved by: extinguishing/reducing liability on partly-paid shares;

cancelling paid-up share capital; or paying off part of paid-up share capital. Court confirmation is

required for public companies. The court considers the interests of creditors and different classes of

shareholder. There must be power in the articles and a special resolution.

A limited company is permitted without restriction to cancel unissued shares as that change does not

alter its financial position.

If a limited company with a share capital wishes to reduce its issued share capital it may do if:

 The power to do so has not been restricted by the company's articles (if it does not have power

in the articles, these may be amended by a special resolution).

 It passes a special resolution. (If the articles have been amended, this is another special

resolution)

 It obtains confirmation of the reduction from the court

2.1 Solvency statement

A private company need not apply to the court if it supports its special resolution with a solvency

statement.

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