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

Keld plc's directors are considering a purchase of its own shares from a member using the company's cash. Which statement best explains why the capital maintenance principle restricts such a purchase?

Buying back shares reduces the assets available to creditors, so the capital maintenance principle allows it only under prescribed conditions and funding limits. It is not absolutely forbidden, but it cannot be done freely using capital.

  1. AThe purchase reduces the assets available to creditors, so company law permits it only within prescribed conditions and funding limitsCorrect
  2. BThe purchase is always void because a company cannot own shares in itself under any circumstances
  3. CThe purchase is unrestricted provided the seller is a director
  4. DThe purchase affects only the voting rights of members, not creditors

Explanation

Buying back shares returns value to members and reduces the funds that stand behind creditors' claims. For this reason company law allows buybacks only if prescribed conditions are satisfied, with funding generally from distributable profits or a fresh issue, subject to specific exceptions. A blanket prohibition is incorrect because buybacks can be lawful when conditions are met.

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