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Company Law > Capital Maintenance > Flashcards

Capital Maintenance Flashcards

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1
Q

What is the reasoning behind the requirement for capital maintenance?

A

To protect creditors in case the company goes insolvent (Trevor v Whitworth; Guinness plc v Lan Corpn of Ireland).

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2
Q

A share can be said to be made up of what two elements that make up its price?

A
  1. Par or nominal value (required by s542 CA 2006);

2. Premium (optional)

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3
Q

Where does paid premium of a share live?

A

In a premium account separate from the capital (s642 CA 2006).

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4
Q

Are members freely entitled to premiums?

A

No, premiums may only be paid out by way of formal reduction similar to capital reductions.

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5
Q

If you have paid £1000 for 2,000 £1 shares at par value do you have any liability?

A

Yes, a partly-paid share is one which you have not paid the entire par value and you or your estate will always be required to pay the par value of a share before there is no outstanding liability (s74(2) IA 1986).

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6
Q

Out of what can dividends be paid?

A

Distributable profits only (s830(1) CA 2006 and Flitcroft’s Case).

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7
Q

What is the definition of a distribution for the purposes of CA 2006?

A

Distribution of company assets to its members, whether in cash or otherwise.

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8
Q

What is a dividend in specie?

A

A declaration of dividends of assets eg furniture or company shares.

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9
Q

What is the case authority for prohibition on issuing shares at a discount? What is the statutory provision which has taken this prohibition up?

A

Ooregum Gold Mining Co of India v Roper and s552 CA 2006.

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10
Q

How is it possible for a member to not pay the full amount of par value for his shares? Who is this most likely to be the case for?

A

The company may offer to pay on his behalf but this may only come from company profits. This is more likely to occur to employees.

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11
Q

What was the allegation in Re Wragg Ltd?

A

A payment in kind of the omnibus and livery-stable business from Messrs Wragg and Martin to a company which they had set up in exchange for shares in the company was done at a discount. Effectively, the company had issued shares to Wragg and Martin at a discount disguised through a payment in kind.

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12
Q

Did the court agree with the allegations made in Re Wragg Ltd?

A

No, the court found that Wragg and Martin had not undervalued their business and not taken a discount for their shares, but had conducted the transaction in good faith.

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13
Q

What type of payment in kind are public companies prohibited from accepting?

A

Payment in work or services (s585(1)).

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14
Q

How may a company increase its allotted share capital?

A

By ordinary resolution (s617).

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15
Q

What is the minimum amount of share capital a public company is allowed to have?

A

£50k (s763).

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16
Q

What is the minimum amount of share capital a private company is allowed?

A

There is no minimum.

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17
Q

If a dividend is paid out of other funds than distributable profits what is the effect?

A

The payment is unlawful and the director who knew or ought to have known is liable to repay (Flitcroft’s Case).

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18
Q

If a dividend payment exceeds the distributable profits are the directors liable to pay the amount the dividend has exceeded the profits or the full amount they paid out in dividend?

A

The full amount they paid out (Bairstow v Queen Moat Houses plc).

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19
Q

In what situation will a member be held liable to repay for an unlawful distribution?

A

If he knows or has reasonable grounds for believing the distribution is unlawful (s847 CA 2006).

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20
Q

What did the director-shareholders claim the unlawful distribution was in It’s A Wrap Ltd v Gula?

A

Remuneration but it was called ‘dividends’ in the accounts for tax purposes.

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21
Q

What is a scrip dividend?

A

Dividend of shares distributed out of profits.

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22
Q

When do dividends usually occur?

A

Normally after publication of accounts on a yearly basis but it depends on the articles. Sometimes interim dividends are paid.

23
Q

How are dividends declared?

A

Recommended by the board and declared by shareholders in a general meeting.

24
Q

How may remuneration be held as a disguised gift of capital?

A

If a director is a shareholder and is paid for work they have not done (Re Halt Garage (1964) Ltd).

25
Q

How may an asset transfer between companies in a group be held as a disguised gift of capital?

A

If an asset is transferred from Company A at a discount to book value to Company B (Aveling Barford v Perion Ltd).

26
Q

What breach of directors’ duty is most applicable for an unlawful distribution under s847?

A

Promoting the success of the company (s172) (Charterbridge).

27
Q

If an asset is transferred between group companies at below book value and there are distributable profits how is the distribution calculated?

A

The book value minus the consideration. In Aveling Barford £650k - £350k = £300k unlawful distribution.

28
Q

If an asset is transferred between group companies at below book value and there are no distributable profits how is the distribution calculation.

A

The market value minus the consideration. In Aveling Barford £1.52m - £350k.

29
Q

What happens to the profits made from an intra-group transfer?

A

They are held on constructive trust for the initial owner of the asset.

30
Q

What are the procedures for reducing capital?

A

Public company - special resolution confirmed by court who must be satisfied that creditors have consented and debts are repaid or secured (ss641(1)(b), 645-651).
Private company - special resolution and solvency statement (ss641(1)(a) and 642-644).

31
Q

How has the CA 2006 relaxed the rules relating to capital reductions from the CA 1985?

A

An article is no longer required to allow capital reductions (s641(6)).

32
Q

What are the procedures regarding the solvency statement a private company must publish to reduce capital?

A

The directors must publish the statement 15 days before the meeting (s642(1)) and endorse that the company is in a position to pay its debts as they fall in the next year. The statement must then be filed with the Registrar 15 days after the special resolution has been passed (s644).

33
Q

How did the old common law treat share repurchase through capital?

A

They were not allowed (Trevor v Whitworth).

34
Q

Which section now provides for the general prohibition against share repurchases?

A

Section 658.

35
Q

What are the three exceptions to the general prohibition against share repurchases?

A
  1. Redemption (ss685-689);
  2. Repurchase (ss690-708);
  3. Repurchase or redemption using capital (ss709-723).
36
Q

Which type of company is allowed to repurchase or redeem shares using capital?

A

Private only

37
Q

What formalities are required to effect a repurchase or redemption of shares using capital?

A

It requires passing two special resolutions - one for the reduction in capital and the other for directors’ statement and auditors’ report. The reduction must also be advertised.

38
Q

When may shares not be redeemed?

A

If they are not fully paid (s686) or if there is no other class of share in issue (s684(4)).

39
Q

Is there a requirement to have a provision in the articles allowing the company to issue and redeem shares?

A

If the company is public yes, but if the company is private there must not be an express prohibition.

40
Q

How much notice must the Registrar have about a redemption?

A

One month (s689).

41
Q

Who decides the terms of the redemption?

A

The directors, or the members by special resolution.

42
Q

Can a company force a repurchase if a shareholder disagrees?

A

No

43
Q

What is the key difference between a share redemption and share repurchase?

A

In a share redemption the terms are agreed at the point of issue in a statement of capital (s685(3)) whereas the terms in a share repurchase are approved in a contract passed by special resolution at the time when the company wants to repurchase.

44
Q

What is unlawful financial assistance?

A

Where a person acquires or proposes to acquire shares in a public company and that company or a subsidiary gives financial assistance, directly or indirectly, for the purpose of the acquisition (s678(1)). Similarly, where a person acquires or propose to acquire shares in a private company and is assisted by a subsidiary public company that is unlawful (s679(1)).

45
Q

What does s678(3) catch?

A

Post-acquisition financial assistance

46
Q

What is the offence for unlawful financial assistance?

A

Criminal offence ie imprisonment or fine against the company and directors (s680).

47
Q

What are the two exceptions to unlawful financial assistance?

A
  1. The purpose for giving financial assistance was not to acquire shares in itself or a subsidiary (ss678(2)(a) and 679(2)(a));
  2. The financial assistance was incidental to a larger purpose (ss678(2)(b) and 679(2)(b)).
48
Q

What is the effect on any transaction which has been unlawfully financially assisted?

A

It is void.

49
Q

If the public subsidiary giving financial assistance is overseas do the prohibitions in ss678-9 still apply?

A

No, the provisions do not have extra-territorial effect (Arab Bank plc v Mercantile Holdings Ltd).

50
Q

What is the modern test for finding the ‘purpose’ of financial assistance and determining whether it fits into one of the exceptions or is prohibited?

A

Arden LJ in Robert Chaston v SWP confirmed the test given by Lord Hoffmann in Charterhouse v Tempest Diesels which stated that regard should be given to the ‘commercial substance’ of the transaction ie it is a matter of degree whether the transaction is assistance or merely convenience.

51
Q

What was the transaction that was found to be unlawful financial assistance in Chaston v SWP?

A

An invoice for a due diligence report into the target company.

52
Q

What did not constitute unlawful financial assistance in Dyment v Boyden?

A

Entry into a lease in connection with share acquisition.

53
Q

What did not constitute unlawful financial assistance in Corporate Development Partners v E-Relationship Marketing?

A

Agency fees.

Company Law (14 decks)

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