ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law
Kappa Co has a share capital account of $800,000 and a share premium account of $300,000. It wants to repurchase some of its own shares and pay for them out of the share premium account, with no other procedure followed. Which statement is correct under the capital maintenance principle?
This is generally not permitted. Share premium counts as protected capital, so a buyback must normally be funded from distributable profits or proceeds of a fresh share issue, or through a specific statutory procedure. Merely informing shareholders or arguing premium is not nominal capital does not make it lawful.
- AThis is permitted because share premium is not nominal capital
- BThis is generally not permitted; buybacks must be funded from distributable profits or a fresh issue of shares, or by following a specific statutory capital procedureCorrect
- CThis is permitted if every shareholder is informed by letter
Explanation
Share premium is protected capital, so a buyback cannot simply be paid from it. Typical rules allow funding from distributable profits or the proceeds of a fresh issue, or a specific statutory route for private companies. Notifying shareholders does not remove the restriction, and option A wrongly treats premium as unprotected.
Did you get it right without looking?
One question tells you little. A timed set on Capital maintenance and dividend law shows your real accuracy, how long you take and where you lose marks.
More Capital maintenance and dividend law questions
- Orchid Co paid a dividend to shareholders when it had insufficient distributable profits. Shareholder Priya received $5,000 and honestly bel…
- Eskal Ltd paid a dividend that was later found to breach the distribution rules. Which statement about the effect of the members' approval o…
- Marlow Ltd's directors discover after paying a dividend that the interim accounts used were misleading and the company lacked distributable …
- Dunmore Ltd, a private company, proposes to reduce its share capital and return the surplus to shareholders. Its articles do not prohibit re…
- Orchid plc has just bought back some of its shares out of distributable profits, and the shares are cancelled. Which of the following is the…
- Zeta Ltd, a private company, has issued redeemable shares. Its directors wish to redeem them. Which of the following describes the general r…