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

Orwell Co buys back some of its own fully paid shares from a shareholder, Priya, at a price above nominal value. Which statement about maintaining capital is correct?

A buyback must normally be paid for out of distributable profits or the proceeds of a new issue of shares, unless a statutory exception applies. This protects creditors by preventing capital being returned to a shareholder in the form of the purchase price.

  1. AThe purchase must be funded only from distributable profits or the proceeds of a fresh issue of shares, subject to any specific statutory exceptionCorrect
  2. BThe purchase may be funded from any source, because Priya is a willing seller
  3. CThe purchase may be funded from the share premium account without restriction

Explanation

A share buyback reduces the company's assets and so threatens creditors. The general rule is that the company must fund it from distributable profits or a fresh share issue, unless a specific statutory exception applies. Willingness of the seller is irrelevant to creditor protection.

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