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

Zenith Ltd, a private company, wishes to buy back some of its own shares from a retiring shareholder. Under the general principles of company law taught in the LW syllabus, which of the following is the usual position on a company purchasing its own shares?

A company may purchase its own shares, but only if it follows the statutory conditions. These include approval requirements and funding from permitted sources, which protect creditors and maintain capital. It is neither banned entirely nor possible on the board's authority alone.

  1. AIt is prohibited outright and any purchase is void in all circumstances
  2. BIt is permitted only if the purchase complies with statutory conditions, including safeguards for creditors and capital maintenanceCorrect
  3. CIt is permitted freely provided the board of directors alone approves the purchase

Explanation

A company may buy back its own shares only within the statutory rules. These protect creditors by requiring that the purchase is funded from permitted sources and that the correct approval procedures are followed. A blanket ban is wrong because buybacks are lawfully allowed, and board approval alone is not enough.

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