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Summary LAWS10083 Capital Maintenance
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LAWS10083 Capital Maintenance
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Capital MaintenanceCapital Maintenance I
A company cannot acquire or reduce its share capital unless it is permitted by statute. It would
benefit all the members to permit a reduction for issued share capital in some instances, so there
are some exceptions to this general rule;
a. an issue of redeemable shares
b. purchase its own shares
c. reduce capital by spec resolution
d. offer financial assistance for shares.
4 main exceptions - we will talk about the first 3 - financial assistance will be discussed by
parker
GENERAL RULE.
Established by the common law;
Treveor v Whitworth
- in this case the HoL decided that a company couldn’t acquire its own shares even if there would
be a power in the memorandum to do so - a company cannot acquire its own shares- even though
it had express powers - because this would result in a reduction in capital.
Now stated in s.658(1) of CA –
A company cannot be a member of its holding company - this allows the company to reduce the
purchasing of shares through a subsidiary company. The prohibition on acquisition of its own shares
is supplemented by s.136 – which provides that a company cannot be a member of its holding company
either directly or through a nominee and any allotment or transfer of shares in the holding company
from an existing shareholder in the parent to the subsidiary or its nominee is void.
This is aimed at preventing the de facto reduction of capital which would result from a subsidiary
company acquiring shares in its holding company. It would be returning assets to the selling
shareholder.
But note the exception;
The central prohibition can be avoided in certain cases; through a nominee - the shares are
acquired via a nominee - so they haven't got a beneficial interest in them. This prohibition does not
, apply if the nominee acquires fully paid shares from a third party, even if the nominee does so with
funds provided by the company.
The rationale seems to be to ensure that the company receives the full price of the shares as an addition
to its assets, which in the case of acquisition of fully paid shares by a nominee from an existing holder
the company will necessarily have received before the nomniee’s acquisition of shares.
The share remains in the hands of the nominee, so the company’s capital accounts remain unaffected.
Acquisition of shares by the company under a reduction of capital carried out under the provisions
discussed below is exempted from the prohibition.(s.659(2)(a)). Acquisition of own shares nowadays
is common;
Why should the company be permitted by the law to reduce the amounts stated in the company’s
capital accounts? Having built a creditor protecting distribution rule, which is based on the numbers in
the capital accounts, why should the law allow the company to reduce those numbers so as to facilitate
a distribution to shareholders either immediately or in the future.
So in principle it cannot do so but the law has long since recognised that it is legitimate to allow a
company to reduce its capital yardstick in some circumstances, subject to safeguards to protect
creditors and to deal with intra shareholder conflicts, especially conflicts among different classes of
shareholder.
Reasons for allowing this;
1. Allowing investors to exit.
2. The company is not doing so well - so they want to reduce their liabilities
3. It can be ordered by courts - a change to way from a public to private company.
The main reason;
When the company wishes give the investors opportunities to exit the company.
The company could also have less need for equity finance. It is beneficial for a company to
rearrange for changing circumstances given in s.641(4)(a) .
The first example of such a benefit - when the capital is in excess of its needs. One might say that
the return of assets to the shareholders is the driving force behind the transaction and the reduction of
capital is just the consequent adjustment to the balance sheet which is necessary to reflect what has
been done. Reduction of capital appears as a functional substitute for a redemption or repurchase of
shares as discussed in the previous section of this chapter.
(b) when the company would like to reduce the members liability to reduce uncalled capital .
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