ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law
Marlow Ltd buys back 10,000 of its own shares from a shareholder for a price equal to their nominal value. Marlow has ample distributable profits and follows the required procedure. Which of the following describes the usual funding rule for the buyback?
A buyback is normally funded from distributable profits or from the proceeds of a fresh share issue made for that purpose. This preserves the company's capital for creditors. Share premium and bank loans are not the standard permitted sources.
- AThe purchase may be funded from distributable profits, or from a fresh issue of shares made for the purposeCorrect
- BThe purchase must be funded entirely from the share premium account
- CThe purchase must be funded from the proceeds of a new bank loan
Explanation
The normal rule is that a buyback is paid for out of distributable profits or from the proceeds of a new issue of shares made to fund it. This keeps the capital fund protected for creditors. Share premium and loan proceeds are not the standard permitted sources.
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