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

Orion Co issued shares with a nominal value of $1 each at $3 each, raising $3,000,000 in total. The company wishes to know which part is treated as protected under the capital maintenance principle. Which statement is correct?

Both the nominal value of $1,000,000 and the share premium of $2,000,000 are protected. Share premium is treated as capital for maintenance purposes and cannot be distributed to shareholders as dividend, apart from limited statutory uses such as issuing fully paid bonus shares.

  1. AOnly the $1,000,000 nominal value is protected; the premium is freely distributable
  2. BBoth the $1,000,000 nominal value and the $2,000,000 share premium are protected as capitalCorrect
  3. CNeither amount is protected once the shares are fully paid

Explanation

Share premium is treated as part of the company's capital and is subject to the same maintenance restrictions as nominal share capital, except for limited permitted uses such as paying up bonus shares. So the full $3,000,000 is protected. Option A wrongly treats the premium as distributable profit.

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