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

Dunmore Ltd, a private company, proposes to reduce its share capital and return the surplus to shareholders. Its articles do not prohibit reductions. Which approach reflects the typical protections applied to such a reduction?

A reduction of capital normally requires a special resolution of shareholders plus protection for creditors, such as court confirmation or a directors' solvency statement in jurisdictions that allow it. The board cannot act alone, and winding up is not required.

  1. AThe directors may reduce capital by board resolution alone, without informing anyone
  2. BShareholders must approve by a special resolution, and creditors' interests must be protected, for example through court confirmation or a solvency statement depending on the jurisdictionCorrect
  3. CThe reduction is lawful only if the company is first wound up
  4. DOnly the company secretary must sign a notice, with no member approval

Explanation

A reduction needs member approval by special resolution and safeguards for creditors. These safeguards take the form of court approval or, in some jurisdictions for private companies, a directors' solvency statement. A board resolution alone is insufficient.

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