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

Zentra Ltd, a company incorporated in a common-law jurisdiction following the general principles taught in ACCA LW (Global), has issued share capital of 500,000 shares of $1 each, fully paid. The directors propose to use $80,000 of company cash to buy back 80,000 of its own shares from a shareholder, without following any statutory procedure for the purchase, because they say the shareholder simply wants to exit. Which statement best explains why this proposal is objectionable under the capital maintenance principle?

The proposal is objectionable because creditors rely on share capital as a protected fund. Returning $80,000 to a shareholder by an unauthorised buyback reduces that fund, so it is only lawful if the statutory conditions for purchasing own shares are satisfied.

1. AIt reduces the funds available to creditors, who rely on the share capital as a fixed fund, and so is not permitted unless the statutory conditions for a buyback are metCorrect
2. BIt is objectionable only because the shareholder will receive more than the nominal value of the shares
3. CIt is permitted because shareholders may always sell shares back to the company at any price agreed with the directors
4. DIt is objectionable only because the company has not first obtained a court order approving every share transaction