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ACCA Applied Skills · Corporate and Business Law (Global) · Share capital

Basil Ltd issued shares with a nominal value of $1 each at a price of $1.00 per share and then, in the same period, bought them back from a shareholder for $1.40 each out of its distributable profits. Which principle makes this buy-back lawful?

The buy-back is lawful because it is paid from distributable profits and follows the statutory procedure. Distributable profits are not part of the protected capital fund, so creditors are not prejudiced, which is why the general ban on buying own shares is relaxed.

  1. AReduction of capital under court order
  2. BThe rule in Trevor v Whitworth is that a company can never buy its own shares
  3. CBuy-back is lawful when paid from distributable profits and the statutory procedure is followed, since creditors' capital fund is not depletedCorrect
  4. DBuy-back is lawful only if paid from share premium

Explanation

The general rule prohibiting a company from acquiring its own shares is relaxed by statute: a buy-back is allowed if funded from distributable profits (or a fresh issue of shares) and the required procedure and approvals are followed. Paying out of distributable profits leaves the capital fund intact. Using share premium is not the general route, and the rule is not absolute.

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