Corporate and Business Law (Global) · Share capital

Maintenance of Capital and Reduction of Share Capital

Updated 11 October 2026 · Fact-checked

Capital maintenance is the rule that a company must keep its share capital and not return it to shareholders except in ways the law permits. This protects creditors, who can only look to the company's assets. Permitted routes include a court-approved reduction, a solvency statement route, and lawful buybacks.

Understand Maintenance of Capital and Reduction of Capital

A limited company's shareholders are not personally liable for its debts. So creditors rely on the company's assets. The capital maintenance principle is the price of limited liability: a company must not hand its share capital back to members except in ways the law allows.

Think of share capital as a fund promised to creditors. If a company could pay it out as dividends or hand it back freely, creditors would be left with nothing. Because of this, dividends may only be paid out of distributable profits, and a company cannot normally buy back its own shares or give financial help to buy them without following strict rules.

Sometimes a company has good reason to reduce its share capital. It may have lost money and want to remove losses from its balance sheet, or it may have more capital than it needs and want to return the surplus to members. Because reduction takes away the creditors' cushion, the law lets it happen only with safeguards.

There are two main routes in the global exam. First, a special resolution confirmed by the court, where the court checks that creditors are protected. Second, in many systems, a special resolution supported by a solvency statement made by the directors. In that statement, the directors confirm that the company can pay its debts when they fall due, and will be able to for the following twelve months. A false statement exposes directors to criminal liability.

A company's articles must also allow the reduction. Once it takes effect, the company must notify the registrar, and the reduction cannot leave the company with no members or no issued shares in a way the law forbids. Keep returning to one question in exams: does this action protect or damage the creditors' fund?

Key formulas to remember

Capital maintenance principle: Share capital must not be returned to members except by a lawful method; The rule that protects creditors in a limited company.
Dividend rule: Dividend only from distributable profits; Paying a dividend from capital breaches maintenance of capital.
Court route to reduction: Special resolution + court confirmation; A special resolution needs at least 75% of votes cast. The court considers creditor protection.
Solvency statement route: Special resolution + directors' solvency statement; Directors state the company can pay its debts now and for the next twelve months. Check which route your syllabus variant applies to private companies.
Typical purposes of reduction: Cancel unrepresented losses, or return surplus capital; Know both reasons and which creditors are affected.

How to solve Maintenance of Capital and Reduction of Capital questions

Use this method for any question on capital maintenance or reduction.

1Identify the action: dividend, buyback, financial help, or a reduction of capital.
2State the principle: capital is a fund for creditors and must not be returned except lawfully.
3Identify the type of company and what the articles allow.
4Name the permitted route: special resolution with court confirmation, or special resolution with a solvency statement.
5Apply the conditions to the facts, such as the vote needed and the directors' confidence about debts for twelve months.
6Consider the effect on creditors and any safeguards or objections available to them.
7State the consequence if the rules were not followed, such as an invalid reduction or liability of directors.
8Give a clear conclusion in one sentence.

Quickest way: Three-question check

When to use it: Use this for objective test questions where you have about a minute.

Does the action return money to members from capital? If no, capital maintenance is not the issue.
If yes, is the route one of the permitted ones: court-confirmed reduction, solvency statement route, or a lawful buyback?
Check the vote: a special resolution is needed for a reduction. Then match the answer option to the safeguard (court or solvency statement).

Common mistakes in Maintenance of Capital and Reduction of Capital

Saying that a company may reduce capital by ordinary resolution.
Students mix up ordinary and special resolutions.
Fix: A reduction of share capital needs a special resolution, plus court confirmation or a solvency statement.
Thinking the solvency statement is made by the shareholders or auditors.
The word statement suggests a report from someone independent.
Fix: The directors make it. They state the company can pay its debts now and for the next twelve months.
Believing capital maintenance stops a company losing money.
Students read maintenance as guaranteeing the capital remains in value.
Fix: The rule only controls returns to members. A company can lose capital through trading losses.
Stating that dividends can come from any reserves.
Confusing reserves with distributable profits.
Fix: Only distributable profits can fund dividends. Capital and non-distributable reserves are protected.
Forgetting the purpose when explaining the rule.
Students memorise steps without the reason.
Fix: Always link the rule to creditor protection and limited liability to earn the explanation marks.

Worked examples

Example 1

Delta Ltd has lost money for several years. Its directors want to cancel part of its share capital that is no longer backed by assets. Explain how it can do this and why the law imposes safeguards.

Show the solution

The action is a reduction of share capital to remove losses.
The principle is that capital is a fund for creditors, so reduction is only allowed by a lawful route.
The company must pass a special resolution, and the articles must not prohibit reduction.
It then uses either court confirmation, where the court considers creditors' interests, or, where available, a solvency statement from the directors that the company can pay its debts as they fall due and for the next twelve months.
The safeguards exist because reduction lowers the cushion available to creditors.

Answer: Delta Ltd passes a special resolution and then obtains either court confirmation or makes a directors' solvency statement, depending on the route available. Safeguards exist to protect creditors.

Example 2

Which one of the following is a valid way for a company to reduce its share capital? A) Ordinary resolution only B) Special resolution with a directors' solvency statement C) Board decision only D) Payment of a dividend out of capital

Show the solution

A reduction needs a special resolution, so A is wrong because an ordinary resolution is not enough.
A board decision alone cannot change the company's capital, so C is wrong.
Paying a dividend from capital breaches capital maintenance, so D is wrong.
B matches the solvency statement route, which requires a special resolution plus the directors' statement.

Answer: B

Exam tips

In objective questions, look for the words special resolution, court and solvency statement. They usually signal the correct option.
In a written answer, always give the reason: the rule protects creditors because members have limited liability.
Keep dividends, buybacks and reduction separate. Name the one the question is testing before you answer.
Apply the facts. Say who must act, what vote is needed and what the safeguard is.

Practice questions from Share capital

Maintenance of Capital and Reduction of Capital in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalMethods and Forms of Capital Reduction

Maintenance of Capital and Reduction of Capital: frequently asked questions

Why is capital maintenance important for creditors?

Shareholders have limited liability, so creditors can only claim against the company's assets. The rule stops the company returning its share capital to members and leaving creditors unpaid.

What is a solvency statement?

It is a statement by the directors that the company can pay its debts as they fall due and will be able to do so for the following twelve months. It supports a reduction of capital on the solvency statement route.

Can a company reduce its share capital without going to court?

In many systems it can, by passing a special resolution and making a directors' solvency statement. Otherwise the reduction needs court confirmation. Check the route applied in your study text.

Why would a company reduce its share capital?

Common reasons are to cancel capital lost through losses or to return surplus capital to members. Both change the creditors' position, so safeguards apply.