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ACCAInstructor: GabrielleChapter 15Capital maintenanceand dividend lawChapter Guide•Explain the doctrine of capital maintenance and capital reduction.•Explain the rules governing the distribution of dividends in both public and private companies.Capital maintenanceand dividend lawCapitalreductionDividendsAcquisition of ownshares Share repurchasePCPDistribution rules Unlawful dividendsFinancial assistance OverviewCAPM and Dividends CAPM and Dividends Dividends Dividends Capital maintenanceCapital maintenance Creditors’buffer Creditors’buffer1.1The single greatest advantage of trading through a company is the limited liability afforded to its members. In order to secure this companies face additional disclosure requirements, and have to follow the rules on capital maintenance, which prevent the members withdrawing their capital without restriction.The rules which dictate how a company is to manage and maintain its capital exist to maintain the delicate balance between the members’ enjoyment of limited liability and the creditors’ requirements that the company shall remain able to pay its debt.1.2The doctrine of capital maintenance operates through the maintenance of the creditors’ buffer. In essence this is a collection of undistributable reserves that must be maintained by the company, thereby restricting the ability of a company to return capital to its members via dividends and share repurchases.Company Y Balance Sheet at 31/12/200X Net Assets Share capital Share premium Revaluation reserve Capital redemption reserve Retained earnings Shareholders’ funds 1,0001001502001004501,000Cred’s buffer 1.Capital Maintenance1.3Creditors’ buffer•The company has suffered a loss in the value of itsassets and it reduces its capital to reflect that fact.•The company wishes to extinguish the interests ofsome members entirely.•The capital reduction is part of a complicatedarrangement of capital which may involve, for instance, replacing share capital with loan capital.Why reduce share capital?2.Capital Reductiona)Removing liability for unpaid calls on issued sharecapitalb)Paying back excess capital to shareholders, on fullypaid sharesc)Cancelling paid up share capital that has been lost 2.1The procedures under which a company may reduce its capital are stated in the CA 2006, allowing for three ways in which this can be achieved: (pls refer to BPP P283)Chapter 15 Capital maintenance and dividend law2.Capital Reductiona) A special resolution is passedb) A statement of solvency is produced within 15 days ofthe resolutionc) A copy of the solvency statement and a statement ofcapital are sent to the registrar within 15 days of the resolution2.2Per the CA 2006 private companies may reduce capital without court approval by following the procedures below:Chapter 15 Capital maintenance and dividend law2.Capital Reduction2.Capital Reduction2.3Public companies must continue to follow the established procedure which requires court approval for any reduction of capital and allows any member or creditor to object.• 3.1share repurchase(a) A market purchase(b)Off-market purchase3.2Public companies are forbidden from repurchasing shares out of capital (creditors’ buffer); however the rules for private companies are relaxed, allowing for purchases out of capital, known as Permissible Capital Payments (PCPs).Rules related to the power to declare a dividend:• The company in general meeting may declare dividends•No dividend may exceed the amount recommended by the directors who have an implied power in their discretion to set aside profits as reserves.•The directors may declare such interim dividends as their consider justified.•Dividends are normally declared payable on the paid up amount of share capital.•A dividend may be paid otherwise than in cash.•Dividends may be paid by cheque or warrant sent through the post to the shareholder at his registered address. If shares are held jointly, payment of dividend is made to the first-named joint holder on the register.4.DividendsPower to declare dividendsPrivatePublic Accumulated realised profitsAccumulated realised profits lessless Accumulated realised losses Accumulated realised losseslessAccumulated unrealised lossesChapter 15 Capital maintenance and dividend law4.Dividends4.14.2In essence therefore, a private company may only pay out itsretained earnings as a dividend; a public company must further deduct any losses it has made, but has yet to realise, such as negative revaluation reserves.4.3 Should a company make a distribution in excess of that allowed bythe rules above (i.e. out of capital) the dividend is deemedunlawful.4.4 Should directors have knowingly authorised an unlawful dividendthey will be liable to replace any such dividends personally.Where a shareholder ought to have reasonably known thedividend they received was unlawful they will be similarly liable.4.5 Should the company‘s auditors have advised on an unlawfuldividend policy they may be liable for professional negligence. Chapter 15 Capital maintenance and dividend law4.DividendsUsing the following balance sheet extracts, advise on the maximum lawful dividend that could be paid if it was from:(a) a private company(b) a public companyShare CapitalShare Premium Revaluation Reserve Capital Redemption Reserve Retained Earnings Shareholders' Funds $m 200 150 (200) 100 750 1,000Chapter 15 Capital maintenance and dividend law Lecture example 1•Profits available for distribution in a private company may be defined as•A Accumulated realised profits lessaccumulated realised losses•B Accumulated realised profits less losses for the current year•C Accumulated realised profits•D Accumulated realised profits lessaccumulated realised and unrealised lossesChapter 15 Capital maintenance and dividend lawLecture example 2Section Topic Summary1Capitalmaintenance The rules on capital maintenance restrict the ability of a company to return funds to shareholders via share repurchases and dividends.2Capitalreduction A company may reduce its capital by removing liability for unpaid calls, paying back excess capital, or cancelling lost shares. Private companies no longer require court approval for this process.3Acquisition ofown shares Share repurchases may be either on, or off-market. Private companies only may repurchase shares to a value in excess of their retained earnings via a PCP. The rules governing PCP’s are extremely strict.Chapter 15 Capital maintenance and dividend law Chapter summarySection Topic Summary4Dividends The payment of dividends in a private company are limited ineffect to its retained earnings. Public companies have tofurther restrict this amount by any unrealised accumulatedlosses they have suffered. Unlawful dividends will have torepaid by the directors, and possibly shareholders.5Financialassistance Public companies are generally forbidden fromproviding financial assistance to anyone wishing to purchase shares in the company. However number of statutory exceptions exist to the general rule of prohibition including employee share schemes and banks. Failure to comply with the law is a criminal offence.Chapter 15 Capital maintenance and dividend law Chapter summary。
