ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law
Zenith Ltd is a private company. Its directors propose that the company lend money to Mr Rao so that he can buy shares in Zenith Ltd from an existing shareholder. In general terms, what is the main concern of company law about this proposal?
The concern is that lending to Mr Rao to buy Zenith's shares is financial assistance for a share purchase. Many legal systems restrict this because it can deplete company resources, harming creditors and other shareholders, and can undermine capital maintenance.
- AThe loan is financial assistance for the purchase of the company's own shares, which many legal systems restrict to protect creditors and shareholdersCorrect
- BThe loan is a distribution of profits and must be approved as a dividend
- CThe loan is a variation of class rights and needs the consent of every class
- DThe loan is a bonus issue and must be paid for out of the share premium account
Explanation
Rules on financial assistance restrict a company from using its own resources to help someone acquire its shares. The aim is to protect creditors and minority shareholders and to prevent the company's capital being depleted indirectly. The loan is not a dividend, a variation of class rights or a bonus issue.
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