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Chapter 16 Capital Maintenance (Payment of Dividends (Directors declare…
Chapter 16 Capital Maintenance
Capital Maintenance (Points)
Members contribute capital to the company
Maintained by way of net assets
Known as buffer fund.
Called 'shareholder's equity' comprising of share capital &
undistributable reserves
Undistributable reserves
:
share premium account
capital redemption reserve
accumulated unrealised profits less accumulated unrealised losses
Any other reserve identified by company's constitution as undistributable
Development of principle of capital maintenance addresses these areas:
restrictions on payment of dividends
restrictions on reduction of capital
assistance given to outsiders to acquire company's shares
Payment of Dividends
Directors declare dividends and members approve
Members dont have automatic right to receive dividend;
approve one at general meeting but cant vote to increase dividend proposed by directors. Only receive if have distributable profits.
Dividends usually paid based on paid-up capital of company
and in form of cash payment or in another form (additional shares)
Dividend is a debt only from when it is declared and due for payment. If declared and unpaid, - deferred debt.
Unclaimed dividends become statute barred after 6 years
Dividends only claimed from: accumulated realised profits less accumulated realised losses.
No distinction between capital profits and revenue profits
Reduction of Capital
Company may reduce capital but under strict control.
Three authorities needed:
Special resolution
Power in constitution
Consent of court (if creditors are affected)
Three reasons to reduce:
Company suffering losses and to eliminate them (no affect on creditors)
Company wants to cancel liability of a share - eg £1 share, 70p paid up, to become a 70p fully paid share. (affects creditors - reduces assets and so need all 3 authorities)
Company wants to restructure capital funding, eg replace some shares by way of loan capital.
Court is involved because creditor's rights adversely affected
Share Capital
Illegal to issue shares for amount lower than nominal value
Any excess of nominal value will be credited to share
premium account
Share premium account is an undistributable reserve with limited uses:
finance issue of fully paid bonus shares to existing members
write of preliminary and formation expenses
provide for premium payable on redemption of shares or debentures
write off expenses and discounts allowed on issue of shares/debentures
Discounts allowed and issue of shares is illegal. But private companies are able to issue shares in consideration for non-cash goods or services received. True/fair value of these goods can be lower than nominal value of shares issued. But not illegal, but only applies to PRIVATE companies.
Variation of class rights: rights attach to a particular class of share and refer to:
voting right
entitlement to dividends
return of capital in a liquidation
If variation of rights is specified by constitution, then follow constitution. If not, then special resolution needed.
If constitution provides for variation, it could require just an ordinary resolution or could require some greater majority than 75%. These provisions apply to companies even without share capital, eg limited by guarantee.
Treasury Shares
Companies are now allowed to purchase their own shares and cancel them.
A lot of commerical sense in this concept: if directors have confidence in company, good thing for company to purchase its own shares for investment. Subsequent cancellation would reduce number of shares in issue and strengthen earnings er share.
Acquisition should be financed from distributable profits to protect interests of company's creditors. This is to maintain 'buffer fund' or 'creditors buffer fund' , statutorily known as 'share capital plus undistributable reserves'
Recently, public company now allowed to purchase own shares, and instead of cancelling them, may choose to hold them 'in treasury' until when choose to cancel shares or sell them (Effectively re-issue them).
Share held in treasury:
available for re-issue without normal formalities associated with a share issue
must have been quoted on a stock exchange
shall carry no voting rights
not entitled to receive dividend
when sold shall cause any consideration received to be treated as realized profit
when treasury shares are cancelled company must send return to Registrar - a statement of capital - confirming that company continues to satisfy minimum share capital requirements for public company.