Chapter 17 Capital Maintenance and Dividend Law Flashcards
What is the purpose of capital maintenance?
That limited companies should not be allowed to make payments out of capital to the detriment of company creditors
Do limited companies are permitted to cancel unissued shares?
Yes because this change do not alter their financial position
How a limited company can reduce its issued share capital?
1)If it has the power to do so given by the company’s articles
2)By passing a special resolution
3)Obtaining confirmation of the reduction by the court
What is the procedure of capital reduction for private companies?
By passing a special resolution supported by a solvency statement
How many days before the meeting where the special resolution is to be voted on solvency statement should be provided?
15 days before the meeting
What is a solvency statement?
A declaration by directors that there is no ground to suspect that company is going to be insolvent for the next 12 months
What are the benefits of solvency statement to private companies?
Rather than going to court for capital reduction it enables
1)faster speed of the procedure
2)lower cost of filing documents
What are the different methods of reducing capital?
1)Extinguish or reduce liability on partly paid share
2)Pay off aprt of paid up share capital out of surplus assets
3)Cancel paid up share capital which has been lost
What are the concerns of court when it recieves application for reduction of capital?
1)The effect of reduction on company’s ability to pay its debts(creditors are protected or not)
2)Whether the reduction is fair in its effect on different classes of shareholders
Where paid up share capital is to be reduce what steps the court will take for creditors?
The court requires that creditors shall be invited by advertisement to state their objections(if any) to the reduction
How a company can prevent advertising for creditors objections?
1)Pay off all creditors before application is made to the court,or
2)Produce to the court a guarantee that its existing debts will be paid in full
What will be the procedure where reduction of capital alters class rights?
Consent of the class must be obtained under the variation of class rights procedure
What are the neccessary actions to take so that reduction in capital should not confuse or mislead people?
The court insist that the company must add ‘and reduced’ to its name or publish explanation of the reduction
On what basis dividends are declared?
Normally declared payable on the paid up share capital
When do a dividend becomes a debt?
When it is declared and due for payment
