Capital Maintenance and distribution Flashcards
Rules of capital maintanence
1) raise capital it was supposed to raise
2) maintains capital for benefit and protection of its creditors
3) primary concern is protection of creditors (particularly unsecured ones)
Common law approach to capital maintenance (case)
Trevor v Whitworth; when creditors provide credit to company they are providing this bearing in mind that the company would have a certain amount already paid and this amount should not be paid out to shareholders because creditors are entitled no part of capital paid in has been paid out except in ordinary course of business
Reduction of Capital:
when is capital reduced?
1) company has excess capital and may with to return to members rather than expand company
2) when company has encountered financial difficulties and declared share capital not actual value of C’s assets
Reduction of capital for private companies
can be done by special resolution (75%) supported by solvency statement by all directors no more than 15 days after resolution planned + £10 duty fee (£50 for same day service)
Solvency statement includes a particular statement under S.643 that if winding up begins within 12 months of date of statement company will still be able to pay debts in full
company must file resolution and solvency statement with registrar; will be accepted provided at least one shareholder remains (S.641(1)(a), 642 & 644
Reduction of capital for public companies
S.641-651 CA 2006; done by special resolution confirmed by court (S.641(1)(b)) - court must confirm reduction only when satisfied creditors have consented, been paid or had debts secured (S.648)
Court order & statement must be registered at companies house.
(S.646 & 645 = incidences where creditors may object)
Reduction capital for public companies case law
Scottish Assurance v Wilson & Cycle; (illustrates court’s discretion)
- refused reduction of capital for anticipated liquidation as preference SH opposed reduction due to affect it would have on participation of surplus assets post liquidation. HELD; court refused claim and stated reduction fair and creditors interests secured because P SH could not participate in surplus assets anyway and were well compensated by cumulative preferential dividends.
Order payment made in reduction scenario (CASE)
Re Chatterly v Whitfiled colleries; reduction carried out in same order in which shares would rank in winding up. In case company reduced capital by paying off preference shareholders first .
Need for separate calls meetings for approval? (CASE)
Re Saltdean Estate Co. held non need as preference shareholder should expect risk of their hope of future profits to be frustrated by liquidation or reduction in capital
Articles must be considered in reduction of capital (CASES)
House of Frasor v ACGE investment; proposed cancellation of shares would require satisfaction of contractual rights of shareholders as it is not merely a variation of the same rights but a removal of such rights.
Re Investment Holders Trust; when voting is needed at class level, shareholders must consider benefits of class as a whole.
What is company’s financial assistance?
given by a company to someone who is about to acquire shares of the company - general rule is company cannot assist financially in acquisition of shares.
Ban lifted for Private companies after CA 2006 (forms of financial assistance outlined in S. 677) but still seen as a form of market manipulation for public companies
introduced originally to prevent abuse of asset stripping whereby a bidder, after taking control of C, uses assets of C to pay prices of shares. = such abuse may prejudice interests of creditors of C and interests of any shareholder who does not accept offer to acquire their shares.
Case of when financial assistance is prohibited
Chaston v SWP Group; DRCH was holding co. of DRC, SWP interested in acquiring DRC’s shares. Accountancy report required to complete this and cost was invoiced to DRC - held form of financial assistance not allowed because report should have been paid by holding company or the buyer.
contrast; Anglo Petroleum v TFB - merely change in value of shares not assistance in acquisition of shares (involved seller only agreeing to sell shares of a C undergoing restructuring if received £15 million for shares)
Exemptions to financial assistance (S.678(2)) + Case
if given in good faith and best interests of company or if company’s principal purpose is not acquisition of shares or this is incidental part of larger purpose.
Brady v Brady; (difficulty determining principled purpose) interpreted principled purpose narrowly and made distinction between actual purpose and reason why a purpose is formed. - Academic critique: appears to restrict unduly the scope of principal purpose exception and makes it very difficult to determine what sort of situation would fall within scope.
Consequences of unlawful financial assistance
company liable for fine (S.680) and guarantee agreement will be unenforceable by either party.
If director authorized unlawful FA can be argued they breached their fiduciary duties to company under S.171, 172 & 175.
Remedies for minority Shareholders affected by shares
- may bring unfair prejudice under S.994 and claim their interests as a member have been prejudiced by guarantee agreement. - if court satisfied may issue injunction to refrain assistance in breach of statutory provisions (S.996(2)(b))
- may also make derivative action on behalf of co. under S.260 - 263 to challenge directors breach of fiduciary duties = SH need to satisfy 2 stage procedure under S.621. - court take restrictive approach and unlikely to continue claim if can seek recovery through Prejudice petition.
Dividend distribution - primary rule
company can’t make distribution to any members except out of profits available for that purpose (S.830) - distribution defined widely in S.829
No rule that all profits must be distributed (until winding up) and there has been no English case in which shareholder has succeeded in an action brought to compel a company to pay a dividend.
Distributed profits = accumulated realised profits minus accumulated realised losses
