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

Orion plc buys back 10,000 of its own $1 shares out of distributable profits. What must the company do regarding the nominal value of the shares bought back?

The company must transfer an amount equal to the nominal value of the cancelled shares from distributable profits to a capital redemption reserve. This is an undistributable reserve, so the overall capital protecting creditors is maintained despite the buyback.

  1. ATransfer an amount equal to the nominal value of the shares bought back to a capital redemption reserveCorrect
  2. BAdd the nominal value to the share premium account
  3. CPay the nominal value to the company's creditors
  4. DCredit the nominal value to the distributable profits

Explanation

When shares are bought back out of distributable profits, the nominal value is transferred to a capital redemption reserve. This keeps the company's capital intact because the reduction in share capital is replaced by an undistributable reserve. Crediting distributable profits would defeat that purpose.

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