ACCA Applied Skills · Corporate and Business Law (Global)

Capital maintenance and dividend law: formula sheet

Full chapter guide

Key formulas

General rule (Trevor v Whitworth): Company buys own shares = unlawful, unless a statute allows it; The case gave the common law rule. Modern law allows buybacks and redemptions under set conditions.
Dividend rule: Dividends may only be paid out of distributable profits; Paying a dividend out of share capital is a return of capital and is unlawful.
Reduction of capital: Reduction is lawful only if the statutory procedure is followed; Typically a special resolution plus either a solvency statement or court approval, depending on the jurisdiction and company type.
No issue at a discount: Issue price ≥ nominal value of the share; Shares generally cannot be allotted for less than nominal value.
Purpose: Capital maintenance = protection of creditors; Use this as the reason in any written explanation.
Core rule for all companies: Distributable profits = accumulated realised profits − accumulated realised losses; Both totals run from incorporation, net of amounts already distributed or capitalised. Applies to private and public companies.
Extra test for public companies: Net assets after distribution ≥ called-up share capital + undistributable reserves; Applies in addition to the core rule. A public company must satisfy both.
Net assets: Net assets = total assets − total liabilities; Use the figure after deducting the proposed distribution.
Undistributable reserves: Share premium + capital redemption reserve + (accumulated unrealised profits − accumulated unrealised losses) + any reserve the law or constitution bars from distribution; The unrealised element counts only where unrealised profits exceed unrealised losses.
Unlawful distribution link: A member who knew or had reasonable grounds to believe the distribution was unlawful may have to repay it; Directors who authorise an unlawful dividend may also face liability. See the related topic on unlawful dividends.
Distributable profits: Accumulated realised profits − accumulated realised losses; Dividends may be paid only out of this amount. Unrealised profits and share capital are not available.
Member liability rule: Member must repay if they knew, or had reasonable grounds to believe, the distribution was unlawful; Test knowledge at the date of payment. Innocent members are generally not liable.
Director liability rule: Directors who authorise an unlawful dividend can be required to restore it to the company; Liability is for breach of duty to the company. The company or its liquidator enforces it.
Amount of unlawful dividend: Dividend paid − distributable profits available; Use this to find the excess if the dividend is only partly unlawful.
General rule: Assistance given for the purpose of share acquisition = restricted unless an exception applies; The company or a subsidiary must give help to a person to acquire shares in the company or in its holding company, directly or indirectly.
Forms of assistance: Gift, loan, guarantee, security, indemnity or other help that materially reduces net assets; Look for the company's resources being used or put at risk to fund the share purchase.
Purpose exception: Principal purpose not to assist acquisition, or incidental to a larger purpose, and given in good faith in the company's interests; Many systems allow this exception. Check it applies in the question's jurisdiction.
Other common exceptions: Lawful dividends, allotment of bonus shares, lawful capital reduction, lawful buyback, employee share scheme help, lending in the ordinary course of a lending business; Exact lists vary. Name only those the question supports.
Private company position: Often permitted, sometimes with approval or solvency safeguards; Do not state that all private companies are free to give it unless the jurisdiction in the question says so.
Special resolution majority: Votes in favour ≥ 75% of votes cast; Needed for any reduction of share capital. Abstentions are not votes cast.
Solvency statement route: Private company + special resolution + directors' solvency statement made in the 15 days before the resolution + documents delivered to the registrar within 15 days after the resolution; Public companies cannot use this route. The opinion is: no grounds to conclude the company cannot pay its debts, and it can pay them as they fall due over the next year (or in full within 12 months of winding up, if winding up is planned).
Court route: Any company + special resolution + court confirmation + registration of order; Mandatory for public companies. Creditors can object.
Result of reduction: Share capital falls; the reduction may reduce or extinguish liability on partly paid shares, return capital to members, or write off losses; State the purpose when asked why a company would reduce capital. Whether any reserve created is distributable depends on the route and any court conditions.
Redemption: when allowed: Articles authorise + redeemable terms at issue + other non-redeemable shares remain in issue; Shares must be fully paid and paid for on redemption.
Funding sources (any company): Distributable profits OR proceeds of a fresh issue made to fund it; These are alternatives, not a ranking. Premium on redemption or purchase normally comes from distributable profits.
Payment out of capital: Permissible capital payment = purchase price − available distributable profits − proceeds of any fresh issue made for the purpose; Private companies only, and only for the shortfall. Public companies cannot do this.
Off-market purchase approval: Contract approved by special resolution (s.694) before it is made (or contract conditional on approval); The shareholder whose shares are being bought cannot use their votes if the resolution would pass only because of them.
Market purchase approval: Ordinary resolution (s.701) authorising the purchase, with a maximum number of shares, price limits and an expiry date; The authority must specify an expiry date no later than 18 months after the resolution is passed.
Payment out of capital approval: Directors' statement of solvency + auditor's report + special resolution passed on or within a week after the date of the statement; Creditors and members can object to court within 5 weeks after the resolution. The payment is made 5 to 7 weeks after the resolution.
Treasury shares: Qualifying shares (shares listed or traded on a recognised/qualifying market) bought out of distributable profits; They can be sold, transferred for employee share schemes, or cancelled.

Quick revision

Share capital is a protected fund for creditors, not a pool for shareholders.
A dividend may be paid only from distributable profits.
Distributable profits are broadly accumulated realised profits less accumulated realised losses.
Dividends are declared according to the rights of each class of share.
A shareholder who knows a dividend is unlawful may have to repay it.
Directors who approve an unlawful dividend may be personally liable to the company.
Buybacks and redemptions must follow strict conditions on funding and approval.
Capital reduction usually needs shareholder approval and protection of creditors.
Financial assistance rules restrict a company funding the purchase of its own shares.
In a scenario, name the transaction first, then test every condition.
One failed condition makes the whole transaction unlawful.

Common mistakes

Saying a company can never buy its own shares. Fix: State that the common law rule is a bar, but statute allows buybacks and redemptions on conditions.
Thinking capital maintenance means capital can never be reduced. Fix: Remember it protects creditors. A reduction following the proper procedure is lawful.
Treating a revaluation surplus as distributable Fix: Ask if it is realised. An unsold revaluation is unrealised and cannot be distributed.
Using only the current year's profit Fix: The test is accumulated realised profits less accumulated realised losses from the start. Earlier losses reduce what you can pay.
Saying every shareholder must repay an unlawful dividend. Fix: Always ask what the member knew or had reasonable grounds to know at payment.
Counting share capital or unrealised profits as distributable. Fix: Only accumulated realised profits less realised losses are distributable.
Saying all financial assistance is always unlawful Fix: Always state the rule, then test each exception before you conclude.
Ignoring the purpose of the help Fix: Ask why the help was given. A genuine commercial purpose can fall within an exception, if the rule applies in the question.
Saying an ordinary resolution is enough. Fix: Remember that reducing capital changes the protected fund, so a special resolution (75%) is always needed.
Allowing a public company to use the solvency statement. Fix: Link public companies with the court route every time.

Exam tips

Link every answer to creditor protection. Examiners reward the reason as well as the rule.
Name Trevor v Whitworth for the general ban on a company buying its own shares, and state the holding in one sentence.
In objective questions, look for options that skip a required step, such as a reduction without a resolution. These are usually wrong.
In a 6-mark scenario, structure your answer as rule, exception, application, conclusion.
Do not quote section numbers unless the question gives them. Explain the rule in plain words.
Check public or private before doing any arithmetic. It decides how many tests you need.
In objective questions, expect distractors that include unrealised profits or share premium. Exclude them from realised profit.
Remember the net asset test is applied after the dividend, so deduct it before comparing.