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

Alder Ltd, a private company, wishes to pay a dividend to its shareholders. Under the general principle of company law applying in most jurisdictions, from which source may a dividend normally be paid?

A dividend may normally be paid only out of accumulated realised profits less accumulated realised losses. Share capital and share premium are undistributable capital, protected for creditors, so dividends cannot be paid from them under the capital maintenance rules.

  1. AAccumulated realised profits less accumulated realised lossesCorrect
  2. BThe balance on the share premium account
  3. CThe balance on the share capital account

Explanation

Capital maintenance requires that distributions are made only from distributable profits, being accumulated realised profits less accumulated realised losses. Share capital and share premium are undistributable capital reserves, so paying dividends from them would return capital to shareholders and prejudice creditors.

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