ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law
Zeta Co has issued share capital of $500,000. Its directors propose to use $100,000 of the company's own cash to pay shareholders a return of capital, with no court approval or statutory reduction procedure. Which statement best describes the position under the capital maintenance principle?
The payment is generally prohibited. Under the capital maintenance principle, share capital must be preserved as a buffer for creditors and can only be returned through a lawful statutory procedure, not by simply paying cash to shareholders, even if the directors think the company is solvent.
- AThe payment is permitted because the shareholders own the company's cash
- BThe payment is generally prohibited because share capital is protected for the benefit of creditorsCorrect
- CThe payment is permitted if the directors consider the company solvent
Explanation
The capital maintenance principle holds that paid-up share capital must not be returned to shareholders other than through a lawful procedure, because creditors rely on it as a fund. Shareholders do not own the company's assets, the company does, so option A is wrong. Directors' opinion of solvency alone does not authorise an unlawful return of capital.
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