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

Orchid plc has just bought back some of its shares out of distributable profits, and the shares are cancelled. Which of the following is the correct treatment of the shares and the company's capital?

On cancellation, issued share capital is reduced by the nominal value of the shares. Where the purchase was paid from distributable profits, an equal amount goes into the capital redemption reserve so that the capital fund protecting creditors is maintained.

  1. AThe shares are cancelled and the issued share capital is reduced by their nominal value; an amount equal to the nominal value is transferred to a capital redemption reserveCorrect
  2. BThe shares are cancelled but the issued share capital stays unchanged
  3. CThe shares are held as an asset of the company and carry full voting rights

Explanation

When shares are bought back from distributable profits and cancelled, the issued capital falls. To prevent a reduction in the creditor protection fund, a sum equal to the nominal value is transferred to the capital redemption reserve, which is treated like share capital. Shares held by the company could not vote.

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