ACCA Applied Skills · Corporate and Business Law (Global) · Share capital
Palm Ltd has 500,000 ordinary shares of $1 each, fully paid, and a share premium account of $80,000. The members propose a reduction of capital by special resolution, paying $0.40 per share back to members. Assuming the company law reduction rules are followed, what is the main purpose of the additional safeguards, such as court confirmation or a solvency statement, applied to this reduction?
The safeguards exist to protect creditors. Share capital acts as a buffer for those dealing with the company, so returning $200,000 to members weakens it, and court confirmation or a solvency statement ensures the company can still pay its debts.
- ATo ensure the directors personally guarantee the shares
- BTo ensure that members receive a dividend in addition
- CTo protect creditors from the loss of the capital buffer they rely onCorrect
- DTo prevent the company from ever issuing shares again
Explanation
Share capital is a fund for creditors, and returning $200,000 (500,000 x $0.40) reduces it. Safeguards such as court approval or a solvency statement protect creditors. They do not create guarantees or dividends.
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