Corporate and Business Law (Global) · Capital maintenance and dividend law

Capital Maintenance Principle in Company Law

Updated 11 October 2026 · Fact-checked

The capital maintenance principle says a company must keep its share capital intact and must not return it to members except in ways the law allows. It protects creditors, who can only look to the company's assets. Trevor v Whitworth held that a company cannot buy its own shares unless the law permits it.

Understand Capital Maintenance Principle

A company has limited liability. Members are not personally liable for company debts beyond what they owe on their shares. So creditors can only look to the company's assets to get paid.

Share capital is a fund that members put in. Creditors rely on it as a cushion. If the company handed it back to members, creditors would be left with less. The capital maintenance principle exists to stop that. Capital must not be paid out to members in a way that is not authorised by law.

The key case is Trevor v Whitworth. The company bought back shares from a member's estate and then tried to refuse to pay the balance. The House of Lords held that a company cannot buy its own shares, because this would return capital to members and prejudice creditors. Today this general rule is modified by statute in many countries. Companies can buy back or redeem shares, but only under strict conditions.

The principle covers more than buybacks. It also restricts paying dividends out of capital, reducing share capital without following the required procedure, and giving financial assistance to buy the company's own shares. Shares also cannot normally be issued at a discount to their nominal value.

In the exam, think of the principle as a rule with exceptions. The rule: capital stays in. The exceptions: lawful buyback or redemption, lawful reduction of capital, and dividends paid from distributable profits. Always ask whether the payment is a lawful route or a disguised return of capital. Exact statutory details differ by jurisdiction, so use the rules as the ACCA LW syllabus presents them.

Key formulas to remember

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.

How to solve Capital Maintenance Principle questions

Use this method for any scenario or objective question on capital maintenance.

1Identify what the company is doing: buying shares, paying a dividend, reducing capital, issuing shares or giving financial assistance.
2Ask whether money or value is going to members out of capital.
3State the general rule: capital must be preserved, and Trevor v Whitworth bars a company buying its own shares without statutory permission.
4Check for a lawful exception: statutory buyback or redemption, approved reduction of capital, or a dividend from distributable profits.
5Test the conditions of that exception, such as authority in the articles, the required resolution, and whether the company is solvent.
6Reach a clear conclusion: lawful or unlawful.
7Add the reason: creditors rely on the capital fund and must be protected.

Quickest way: Capital out, to members, no permission = unlawful

When to use it: Use this for Section A and Section B objective questions where you must pick the lawful or unlawful option quickly.

Underline who gets the money. If it is a member, take care.
Ask whether the source is capital or distributable profit. Capital is a red flag.
Look for a statutory route: buyback, redemption, reduction or dividend from profit.
If a route exists, check the one condition the question mentions, such as a resolution or solvency.
Choose the option that follows the route fully. Reject options that skip a step.

Common mistakes in Capital Maintenance Principle

Saying a company can never buy its own shares.
Students stop at Trevor v Whitworth and ignore later statute.
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.
The name suggests capital is fixed forever.
Fix: Remember it protects creditors. A reduction following the proper procedure is lawful.
Confusing capital with distributable profits.
Both appear in the accounts and both belong to the company.
Fix: Capital is what members paid in. Distributable profits are accumulated realised profits. Only the second can fund dividends.
Forgetting the reason for the rule.
Students memorise the case but not the purpose.
Fix: Always finish with: the rule protects creditors, who cannot sue members for company debts.
Treating the facts of Trevor v Whitworth as the rule.
Case details are easy to mix up with the principle.
Fix: Quote the holding: a company has no power to purchase its own shares, as that returns capital to members.

Worked examples

Example 1

Alpha Ltd has an issued share capital of $500,000 and no statutory authority for a buyback. Its directors agree to buy 10,000 shares from a member for $40,000 out of company funds. Advise whether this is lawful.

Show the solution

The company is paying a member for shares, so company money goes to a member.
The source is company funds, not a lawful buyback route, so it reduces capital.
Under Trevor v Whitworth a company cannot buy its own shares without statutory permission.
No statutory conditions are met here, as there is no authority or procedure.
Creditors rely on the capital fund, and this payment would reduce it.

Answer: The purchase is unlawful. It breaches the capital maintenance principle as set out in Trevor v Whitworth because there is no statutory authority for the buyback.

Example 2

Beta Ltd has share capital of $200,000 and distributable profits of $30,000. The directors want to pay a dividend of $50,000. Advise on the maximum lawful dividend and the reason.

Show the solution

A dividend is a payment to members.
Dividends may only be paid from distributable profits.
Distributable profits are $30,000.
A dividend of $50,000 would use $20,000 of share capital ($50,000 − $30,000).
Paying out capital breaches capital maintenance and harms creditors.

Answer: The maximum lawful dividend is $30,000. Paying $50,000 would return $20,000 of capital to members, which is unlawful.

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.

Practice questions from Capital maintenance and dividend law

Capital Maintenance Principle 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 Principle: frequently asked questions

What is the capital maintenance principle?

It is the rule that a company must keep its share capital and not return it to members except in ways the law permits. It exists to protect creditors. Limited liability means they can only look to company assets.

What did Trevor v Whitworth decide?

The House of Lords held that a company cannot purchase its own shares, because this would return capital to members and prejudice creditors. Statute now allows buybacks and redemption under conditions.

Why is capital maintenance important for creditors?

Creditors cannot claim against members' personal assets. The share capital acts as a cushion of company assets. Keeping it intact gives creditors some assurance that the company can pay its debts.

Can a company ever reduce its share capital?

Yes, but only by following the statutory procedure. This usually needs a special resolution and either a solvency statement or court approval, depending on the jurisdiction.