ACCA Applied Skills · Corporate and Business Law (Global)
Capital Maintenance and Dividend Law for ACCA LW
Capital maintenance law stops a company returning shareholders' money in ways that harm creditors. Share capital is a protected fund. Dividends may be paid only from distributable profits. Buybacks, redemptions, capital reductions and financial assistance are allowed only under strict conditions. In the exam, identify the transaction, then test it against the conditions.
What this chapter covers
This chapter covers the rules that protect a company's capital. The core idea is simple. Creditors of a limited company can only look to the company's assets, not to the shareholders personally. So the law stops shareholders taking those assets out of the company except in controlled ways.
You study six areas. The capital maintenance principle gives the underlying logic. Distributions and distributable profits set when a dividend is lawful. Unlawful dividends deal with the consequences and recovery. Financial assistance, reduction of capital and buybacks and redemption are the other ways capital can leave or be altered, each with its own conditions.
The chapter links to the rest of the paper. It builds on company formation and share capital, and on directors' duties, because directors who approve an unlawful payment may breach their duties and be personally liable. It also connects to corporate finance and insolvency, where creditor protection matters again. Rules differ between jurisdictions in detail, so learn the general principles that the Global variant tests, and apply them to the facts given.
This chapter produces scenario questions that reward careful rule application. Section A questions often ask whether a dividend is lawful, who is liable, or which condition a buyback fails. Section B multi-task questions can combine several of these points in one scenario. The rules are fairly short and the conditions are checkable, so steady practice turns this into a reliable source of marks. Each objective question is all or nothing, so precision on conditions matters more than general understanding.
Capital maintenance and dividend law: topics in the order to study them
- 1Capital Maintenance PrincipleIt gives the reason behind every later rule, so the conditions make sense instead of needing rote memory.
- 2Distributions and Distributable ProfitsThis is the most tested area and the base for judging whether a payment to shareholders is lawful.
- 3Unlawful Dividends and RecoveryIt follows directly from the distribution rules: once you know what is lawful, you can learn who must repay and who is liable.
- 4Share Buybacks and RedemptionThese are lawful distributions of capital or profit with extra conditions, so they build on distribution rules.
- 5Reduction of Share CapitalIt is another exception to the capital maintenance principle, and compares well with buybacks once those are clear.
- 6Financial Assistance for Share PurchaseIt is narrower and rule-based, so it is easiest to learn last, once the protection of capital is familiar.
How to prepare Capital maintenance and dividend law
Aim to understand the purpose of each rule first, then learn the conditions as short checklists you can apply to a scenario.
- Read the capital maintenance principle and explain in your own words why creditors need protection.
- Learn the test for a lawful distribution and what counts as distributable profit, using a simple example with profits and losses.
- Make a checklist for each transaction: dividend, buyback, redemption, capital reduction and financial assistance. List the conditions and who must approve it.
- Learn the consequences of breach: who must repay, who may be liable, and the effect on directors.
- Work through scenario questions, and for each one name the transaction first, then test it against your checklist.
- Compare transactions side by side, for example buyback versus capital reduction, so you can spot which rules apply.
- Review every wrong answer and note which condition you missed.
Common mistakes in Capital maintenance and dividend law
Treating any profit as distributable
Fix: Always net accumulated realised profits against accumulated realised losses before deciding if a dividend is lawful.
Confusing share capital with profits
Fix: Remember that capital is protected for creditors while distributable profit is available for dividends.
Ignoring who is liable for an unlawful dividend
Fix: Learn separately the position of the shareholder, who may need to repay, and the directors, who may be liable.
Mixing up buyback and capital reduction conditions
Fix: Keep a side-by-side list of the conditions for each and check the scenario against the right list.
Accepting an answer that satisfies most conditions
Fix: Check every condition. If one is missed, the transaction fails.
Last-day revision: Capital maintenance and dividend law
- 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.
Capital maintenance and dividend law practice questions
- Zentra Ltd paid a dividend to its members at a time when it had no distributable profits. Under the general principle of capital maintenance…
- Vela Ltd is a private company with distributable profits. It gives a loan to Tom to buy Vela Ltd's shares, and the loan is made in the ordin…
- Dovetail Ltd has accumulated realised profits of $400,000, accumulated realised losses of $150,000 and an unrealised revaluation surplus of …
- Orsen Ltd's articles permit a reduction of capital. The directors propose to cancel $400,000 of paid-up capital and repay it to shareholders…
- Nolan Ltd, a private company, reduces its share capital by a valid procedure and obtains authority. Which of the following is a consequence …
- Zelta Co, a private company, wishes to reduce its share capital by cancelling shares that are not fully paid up, in order to remove an accum…
- Tarn Ltd proposes an off-market purchase of shares from its director, Ms Okoye, under a contract. Which of the following must be satisfied f…
- Which of the following is a lawful way for a company to reduce its share capital while respecting the capital maintenance principle?
Capital maintenance and dividend law in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Capital maintenance and dividend law: frequently asked questions
What is the capital maintenance principle?
It is the rule that a company must not return its share capital to shareholders except in ways the law allows. It exists to protect creditors, who rely on the company's assets. Dividends, buybacks and reductions are therefore controlled.
When can a company lawfully pay a dividend?
A company may pay a dividend only out of distributable profits. These are broadly its accumulated realised profits less its accumulated realised losses. Paying from capital is unlawful.
Who is liable if a dividend is unlawful?
A shareholder who knew or had reason to know the payment was unlawful may have to repay it. Directors who approved it may also be liable to the company. Check the facts for knowledge and involvement.
How should I answer scenario questions on this chapter?
Identify the transaction first, such as a dividend, buyback or capital reduction. Then test it against each condition for that transaction. Pick the option that matches the first condition that fails or the result when all are met.