ACCA Applied Skills · Corporate and Business Law (Global) · Share capital
Karuna Ltd, a private company, has issued share capital of $500,000 and a share premium account of $80,000. The directors want to return $50,000 to shareholders by simply paying it out as a distribution from the share premium account, without following any formal procedure. Which statement is correct?
The payment is not permitted. Share premium is capital, not distributable profit, so it can only be reduced by following the statutory capital reduction procedure. Paying it out informally would breach capital maintenance rules designed to protect creditors, who rely on the capital as a buffer.
- AThis is permitted because share premium is a form of profit available for distribution
- BThis is not permitted, because share premium is capital and may only be reduced by following the statutory reduction procedureCorrect
- CThis is permitted provided the shareholders are informed at the next annual meeting
Explanation
Share premium forms part of a company's undistributable capital. Under the capital maintenance doctrine it can only be reduced through the formal procedure permitted by law, such as shareholder approval and court or solvency statement confirmation. Treating it as distributable profit would breach the rule and prejudice creditors.
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