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

Orla Ltd has 100,000 ordinary shares of $1 each, fully paid, and accumulated losses of $60,000 that it will never recover from. Its members want the balance sheet to reflect reality without paying anything to members. Which proposed action is the correct way to deal with this under company law on reducing capital?

Orla should cancel $60,000 of share capital that is lost or unrepresented by assets, through the statutory reduction procedure. This removes the deficit without any payment to members. Dividends cannot come from capital and subdivision leaves total capital unchanged.

  1. APay a dividend of $60,000 from share capital to clear the losses
  2. BCancel $60,000 of share capital as lost capital, following the statutory reduction procedureCorrect
  3. CTransfer $60,000 from share capital to the directors as compensation
  4. DSubdivide the shares into 160,000 shares of $0.625 each

Explanation

A reduction by cancelling capital that is lost or unrepresented by assets is a recognised type of reduction, requiring the statutory process, with no payment to members. A dividend cannot be paid from capital, and subdivision does not remove losses. Compensation to directors is improper.

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