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

Delmar Ltd wishes to reduce its share capital by cancelling shares that are not fully paid up, releasing shareholders from liability for the unpaid amounts. Which rule best describes the position on creditor protection?

Creditors must be protected. Releasing shareholders from unpaid share liability removes a potential source of funds for creditors, so it is a reduction of capital requiring the formal statutory procedure, not just directors' approval or an informal decision.

  1. ANo protection is needed because the company's net assets are unchanged
  2. BCreditors must be protected, since releasing unpaid liability removes an asset available to meet the company's debts, so the statutory reduction procedure appliesCorrect
  3. COnly the directors must approve, as the reduction affects uncalled capital only

Explanation

Unpaid share capital is a claim the company holds against shareholders and can be called to pay creditors. Releasing it weakens creditors' position, so a reduction of this kind must follow the statutory procedure with shareholder approval and creditor safeguards. Director approval alone is insufficient.

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