Capital Maintenance and Distribution

Question 1

What are the principles of capital maintenance?

Answer 1

Creditors have the right to ensure capital is used properly

Capital can only be given to members legally.

Question 2

Can a company issue shares at a discount?

Answer 2

No - all new shares must be issued at at least nominal value

Question 3

Oorgeum Gold Mining Co v Roper 1892:

Answer 3

House of Lords agreed that shares must not be issued at a discount, following an attempt to do so. The proper route would be to reduce nominal value of shares.

Question 4

Can a company issue shares at a premium?

Answer 4

Yes - However the excess over the nominal amount must be shown in a separate Share Premium account

Question 5

When is the buy back of shares using PROFITS permitted?

Answer 5

If it is not restricted in the Articles and shares are fully paid up

The members pass an ordinary resolution approving it

Must have profits available

Shares bought back are then cancelled. (Company can not own itself)

Question 6

When is the buy back of shares using CAPITAL permitted?

Answer 6

Permitted by the articles

Creditors notified

Directors declare company is solvent for the next 12 months and auditors’ report supports this

An ordinary and special resolution must be passed

Dissentient shareholders and creditors can apply to the Court to complain.

Strict time limits which must be observed

Question 7

Can a company give financial assistance for the purchase of shares?

Answer 7

Under the CA 2006, Private companies are now able to do this. However for public companies it remains illegal.

Question 8

Are redeemable shares allowed?

Answer 8

Yes, but the money to redeem them must come from distributable profits or cash proceeds of a new issues of shares.

Question 9

Bairstow v Queen’s Moat Houses plc 2000

Answer 9

Directors were held personally liable for authorising payment of dividends not out of distributable profits.