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

Zentra Ltd has issued share capital of 500,000 and a share premium account of 80,000. Its directors propose to use 100,000 of the share capital to pay a cash dividend to members while the company continues trading normally. Which statement best reflects the capital maintenance principle?

The payment is not permitted. The capital maintenance principle requires a company to keep its paid-up share capital as a fund for creditors, so dividends cannot be paid out of capital. Director approval or transfers between capital accounts cannot override this rule.

  1. AThe payment is permitted because members own the share capital and may receive it at any time
  2. BThe payment is not permitted because dividends may not be paid out of share capital, which is retained as a fund for creditorsCorrect
  3. CThe payment is permitted if the directors unanimously approve it
  4. DThe payment is permitted if it is first transferred to the share premium account

Explanation

Under the capital maintenance principle, paid-up capital must be preserved as a buffer for creditors and cannot be returned to members as dividends. Approval by directors or moving amounts between capital accounts does not change this. Members' ownership of shares does not give a right to withdraw capital while the company is a going concern.

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