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ACCA Applied Skills · Corporate and Business Law (Global) · Share capital

Orchid plc has 1,000,000 shares of $1 each, issued and fully paid. It has accumulated losses and wishes to reduce capital by cancelling $300,000 of share capital that is no longer represented by assets, with no cash returned to shareholders. Which statement is correct?

The reduction can be made by following the statutory procedure. Cancelling capital lost or unrepresented by assets is a recognised reason, and since no cash leaves the company, creditors are less exposed. It does not require a prior dividend or universal creditor consent.

  1. ACreditors' consent is always required because capital is being reduced
  2. BThe reduction is impossible because no payment is made to shareholders
  3. CThe reduction is permitted only if the company first pays a dividend
  4. DThe reduction may be permitted by following the statutory procedure, and as no money leaves the company, creditors are less at riskCorrect

Explanation

Capital may be reduced to cancel capital lost or unrepresented by assets, provided the statutory procedure is followed (special resolution and, where required, court or solvency-statement approval). Because no assets are returned, creditor risk is lower. A dividend is not a precondition, and creditor consent is not always required.

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