78. Power of company to pay interest out of capital in certain cases

Question 1

78. Power of company to pay interest out of capital in certain cases

Answer 1

General overview
[78.01] Section 78 is another statutory inroad into the capital maintenance rule. Section 78(1) permits the company to pay interest on paid-up share capital that was issued for the purpose of financing the construction of any works or buildings or any plant that cannot be profitable for a long period of time, and charge the interest so paid to capital. This section facilitates investments in long term construction or building projects as it allows the investors to enjoy a return on their invested capital whilst the project is on-going.

Question 2

Conditions to invoke s 78

Answer 2

[78.02] Section 78(1)(a) to (d) states the conditions that has to be satisfied by the company: (i) payment of such interest shall be authorised by the constitution, or by special resolution, and is approved by the court; (ii) court may appoint a person to inquire into the case for such payment and order security for the payment of such an inquiry; (iii) the period for payment shall be determined by the court and shall not extend beyond 12 months after the works or buildings have been completed; and (iv) the rate of interest shall not exceed 5% per annum or as prescribed for the time being.

Question 3

No reduction in capital

Answer 3

[78.03] Section 78(1)(e) clarifies that the payment of interest out of capital shall not operate as a reduction of capital.