Chapter 9 - Capital Maintenance Flashcards
(31 cards)
What was the creditor protection rationale for the existence of the rule against returning share capital to shareholder identified in Trevor v Whitworth (1887)?
Persons who deal with and give money to the company rely on the fact that the company is trading with a certain amount of capital already paid (by shareholders) and they are entitled to assume no part of the capital which has been paid into the coffers of the company has been subsequently paid out.
Does the rationale in Trevor v Whitworth continue to be relevant today?
Yes, although in reality private companies tend to have less that £100 in share capital.
What are the two key components of the capital maintenance doctrine?
1 A limited company cannot reduce its share capital except as authorised by statute.
2 Distributions to members may be mad only out of profits available for the purpose.
Identify 5 sets of legal rules that support the doctrine of capital maintenance.
1 Minimum share capital rules (s 763-767)
2 Basic prohibition of a company reducing its shares (s 617)
3 Requirement that shareholders distributions are only from profits for the purpose (s 829-853)
4 Detailed exceptions to reductions in share capital (Parts 17 and 18 of the Act).
5 The member last principle on winding upm (IA s107)
What is the minimum share capital requirement for a public company?
£50,000 (1/4 paid up) - s 761 CA
Outline the process by which a public company may reduce its share capital.
s 645-651 CA:
1 A special resolution must be passed
2 The company must settle a list of creditors for the court, and either:
- obtain the consent of all creditors
- pay off, or set aside a sum to pay off any creditor
who does not consent.
3 The company must present a petition to the court confirming the reduction
4 The court may make an order confirming the reduction.
5 Register with the Registrar of Companies:
- special resolution
- copy of the court order
- statement of capital as reduced
Outline the process by which a private company may reduce its share capital.
s642-644 CA:
1 Directors conduct a review of the company’s solvency
2 Every director signs a solvency statement
3 Directors send a proposed special resolution to the members
4 Members pass a special resolution
5 File with the Registrar within 15 days:
- a copy of the solvency statement
- a copy of the special resolution
- a statement of capital as reduced
- confirmation statement that the process has been complied with
Of what must the court be satisfied before it confirms a reduction of capital?
1 That all creditors who did not consent have been paid off, or that sufficient money has been set aside with which to pay them.
2 Whether the reduction is fair and equitable to shareholders.
Is a public company permitted to acquire its own shares out of capital?
Yes, but only by using distributable profits, and even then there is no effective reduction in total nominal share value.
What is a distribution?
A distribution of company assets to a shareholder, usually as a dividend.
What is the process for the declaration of a dividend set out in the model articles for private companies limited by shares, and the model articles for public companies?
There may be final (annual) dividends, and interim dividends. Annual dividends are typically recommended by directors and declared by ordinary resolution of members.
Are dividends affected by whether shares are fully paid up?
Yes, dividends will be proportionate to the amount paid up.
Do dividends have to be paid in cash?
Yes, unless the articles permit otherwise.
What is the test applied by the court to determine whether or not a payment is disguised return of capital to a shareholder?
Whether or not the payment is a genuine exercise of power by the company resulting in a genuine payment, rather than a disguised gift out of capital.
What restriction does CA 2006 s 830 Place on the payment of dividends?
A company may only make a distribution out of profits available for the purpose.
What is the significance of accumulated in the definition of “profits available for the purpose” in s830?
Profits and losses are totalled, determining whether the accumulated profits are in the positive (i.e. not just a single year’s profits.
How are profits available for the purpose calculated?
Realised profits - realised losses - dividends paid.
What is the effect of the additional restriction on payment of dividends by a public company imposed by s831?
A public company must only make a distribution up to the amount by which its net assets exceed the aggregate of its called up share capital and undistributable reserves.
What are the “relevant accounts”?
The last annual accounts prepared in accordance with the Act.
Is transfer of an asset at book value by a subsidiary to its parent ever a distribution?
If an asset is transferred at book value, there is no distribution.
Is unlawful payment of dividends a criminal offence?
No, but civil remedies are available to members under s 847.
Are directors liable to compensate the company for unlawfully paid dividends?
Directors are jointly and severally liable for unlawful distributions
What is the potential liability of a member under CA 2006 s847?
A member may be liable to repay any sum received if he knew that the distribution was made in contravention of the statutory distribution rules.
Is knowledge that a dividend is paid in contravention of the CA 2006 a precondition of the shareholder liability under s 847?
Either actual knowledge, or reasonable grounds for believing that the dividend was unlawful.
