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

Which of the following is a lawful way for a company to reduce its share capital while respecting the capital maintenance principle?

A lawful reduction follows the statutory procedure, typically a special resolution backed by a directors' solvency statement or court confirmation. This safeguards creditors, who rely on capital being preserved. A board resolution or informal shareholder agreement cannot validly authorise sharing out the capital.

  1. AThe directors pass a board resolution and distribute the cash the same day
  2. BFollowing the statutory procedure, which typically requires a special resolution and either a solvency statement or court confirmationCorrect
  3. CShareholders informally agree among themselves to share out the capital

Explanation

Capital may only be reduced through a statutory process designed to protect creditors, usually a special resolution plus a solvency statement or court approval depending on the jurisdiction. A board resolution or informal shareholder agreement bypasses creditor safeguards and is ineffective.

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