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

Marlow Co has issued share capital of 500,000 and accumulated losses of 200,000, which the directors consider are permanently lost. The company proposes to reduce share capital by 200,000 to eliminate the losses, with no cash returned to shareholders. Which description of this reduction is correct?

This is a reduction cancelling share capital that has been lost or is not represented by available assets. Nothing is paid to shareholders, so no assets leave the company and creditors are not prejudiced. It is not a return of capital, a dividend or a buyback.

  1. AIt is a reduction that returns capital to shareholders, so creditors must be repaid first
  2. BIt is a reduction cancelling capital that is lost or unrepresented by assets, with no payment to shareholdersCorrect
  3. CIt is an unlawful dividend out of capital
  4. DIt is a share buyback financed from the proceeds of a fresh issue

Explanation

Writing off capital that is lost or unrepresented by available assets involves no outflow of cash to members. Creditors' position is not worsened, as no assets leave the company. It is therefore not a distribution, a dividend or a buyback.

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