CHAPTER 18 CAPITAL MAINTENANCE AND DIVIDEND LAW

CHAPTER 18 CAPITAL MAINTENANCE AND DIVIDEND LAW

INTRODUCTION

The capital which a limited company obtains from its members as

consideration for their shares is sometimes called 'the creditors' buffer'. No

one can prevent an unsuccessful company from losing its capital by trading at

a loss. However, whatever capital the company does have must be held for the

payment of the company's debts and may not be returned to members except

under procedures which safeguard the interest of creditors. That is the price

which members of a limited company are required to pay for the protection of

limited liability. This principle has been developed in a number of detailed

applications.

• Capital may only be distributed to members under the formal procedure of

a reduction of share capital or a winding up of the company.

• A premium obtained on the allotment of shares and profits used to redeem

or purchase shares of the company are statutory reserves subject to the

basic rules on capital.

• Dividends may only be paid out of distributable profits

Study guide

Intellectual level

E Capital and the financing of companies

3 Capital maintenance and dividend law

(a) Explain the doctrine of capital maintenance and capital reduction 2

(b) Examine the effect of issuing shares at either a discount, or at a premium 2

(c) Explain the rules governing the distribution of dividends in both private and

public companies

2

Exam guide

Capital maintenance can be a difficult area. The different components could all be examined separately in a

knowledge question, or as an application question on the liability of a shareholder who took shares at a

discount to nominal value, as in the Pilot Paper.

1 Capital maintenance 6/09

The rules which dictate how a company is to manage and maintain its capital exist to maintain the delicate

balance between the members' enjoyment of limited liability and the creditors' requirements that the

company shall remain able to pay its debts.

Capital maintenance is a fundamental principle of company law, that limited companies should not be

allowed to make payments out of capital to the detriment of company creditors. Therefore the Companies

Act contains many examples of control upon capital payments. These include provisions restricting

dividend payments, and capital reduction schemes.

The rules affecting the possible threats to capital are complicated in certain areas. However, provided you

know the rules, questions on capital maintenance tend to be straightforward.

2 Reduction of share capital 6/09

Reduction of capital can be achieved by: extinguishing/reducing liability on partly-paid shares;

cancelling paid-up share capital; or paying off part of paid-up share capital. Court confirmation is

required for public companies. The court considers the interests of creditors and different classes of

shareholder. There must be power in the articles and a special resolution.

A limited company is permitted without restriction to cancel unissued shares as that change does not

alter its financial position.

If a limited company with a share capital wishes to reduce its issued share capital it may do if:

• It has power to do so in its articles (if it does not have power in the articles, these may be amended

by a special resolution).

• It passes a special resolution. (If the articles have been amended, this is another special

resolution)

• It obtains confirmation of the reduction from the court

2.1 Solvency statement

A private company need not apply to the court if it supports its special resolution with a solvency

statement. A solvency statement is a declaration by the directors, provided 15 days in advance of the

meeting where the special resolution is to be voted on. It states there is no ground to suspect the

company is currently unable or will be unlikely to be able to pay its debts for the next twelve months. All

possible liabilities must be taken into account and the statement should be in the prescribed form, naming

all the directors.

2.2 Why reduce share capital?

A company may wish to reduce its capital for one or more of the following reasons.

• The company has suffered a loss in the value of its assets and it reduces its capital to reflect that

fact.

• The company wishes to extinguish the interests of some members entirely.

• The capital reduction is part of a complicated arrangement of capital which may involve, for

instance, replacing share capital with loan capital.

There are three basic methods of reducing share capital specified in s 641 of the Act.

METHOD

Extinguish or reduce liability on

partly paid shares

WHAT HAPPENS

Eg Company has nominal value

£1 shares 75p paid up. Either (a)

reduce nominal value to 75p; or

(b) reduce nominal value to a

figure between 75p and £1.

EFFECTS

Company gives up claim for

amount not paid up (nothing is

returned to shareholders).

METHOD

Pay off part of paid-up share

capital out of surplus assets

WHAT HAPPENS

Eg Company reduces nominal

value of fully paid shares from £1

to 70p and repays this amount to

shareholders

EFFECTS

Assets of company are reduced

by 30p in £.

METHOD

Cancel paid-up share capital

which has been lost or which is

no longer represented by

available assets.

WHAT HAPPENS

Eg Company has £1 nominal fully

paid shares but net assets only

worth 50p per share. Difference

is a debit balance on reserves.

Company reduces nominal value

to 50p, and applies amount to

write off debit balance

EFFECTS

Company can resume dividend

payments out of future profits

without having to make good

past losses.

2.3 Role of the court in reduction of share capital

When the court receives an application for reduction of capital its first concern is the effect of the

reduction on the company's ability to pay its debts, that is, that the creditors are protected.

If the reduction is by extinguishing liability or paying off part of paid-up share capital, the court requires

that creditors shall be invited by advertisement to state their objections (if any) to the reduction. Where

paid-up share capital is cancelled, the court may require an invitation to creditors.

Normally the company persuades the court to dispense with advertising for creditors' objections (which

can be commercially damaging to the company).

Two possible approaches are:

• To pay off all creditors before application is made to the court; or, if that is not practicable

• To produce to the court a guarantee, say from the company's bank, that its existing debts will be

paid in full

The second concern of the court, where there is more than one class of share, is whether the reduction is

fair in its effect on different classes of shareholder.

If the reduction is, in the circumstances, a variation of class rights the consent of the class must be

obtained under the variation of class rights procedure.

Within each class of share it is usual to make a uniform reduction of every share by the same amount per

share, though this is not obligatory.

The court may also be concerned that the reduction should not confuse or mislead people who may deal

with the company in future. It may insist that the company add 'and reduced' to its name or publish

explanations of the reduction.

2.3.1 Confirmation by the court

If the court is satisfied that the reduction is in order, it confirms the reduction by making an order to that

effect. A copy of the court order and a statement of capital, approved by the court, to show the altered

share capital is delivered to the Registrar who issues a certificate of registration.

QUESTIONReduction of share capital

What are the main methods for a public company to reduce its share capital? What procedures must it

follow?

ANSWER

If a public company wishes to reduce its issued share capital it may do so provided that:

(a) It has power to do so in its articles.

(b) It passes a special resolution.

(c) It obtains confirmation of the reduction from the court: s 641.

Requirement (a) is simply a matter of procedure. Articles usually contain the necessary power. If not, the

company in general meeting would first pass a special resolution to alter the articles appropriately. They

would then proceed to pass a special resolution to reduce the capital.

There are three basic methods of reducing share capital under s 641:

(a) Extinguish or reduce liability on partly-paid shares

(b) Cancel paid-up share capital which has been lost or which is no longer represented by available

assets

(c) Pay off part of the paid-up share capital out of surplus assets

Although these are the methods specified in s 641, they are not the only possibilities.

If method (a) or (b) is used (or is part of a more complex scheme to reduce capital) creditors must be

invited to object, and their consent must be granted. An alternative is that they are paid off, which will

allow the court to confirm the reduction.

It should be remembered that public companies are subject to a minimum capital requirement, currently

of £50,000. This means that any public company wishing to reduce its capital below this figure will only be

allowed to do so by the court if it re-registers as a private company, which is not subject to the minimum

capital requirement. This situation is relatively rare.

3 Issuing shares at a premium or at a discount

In issuing shares, a company must fix a price which is equal to or more than the nominal value of the

shares. It may not allot shares at a discount to the nominal value.

Every share has a nominal value and may not be allotted at a discount to that: s 580.

In allotting shares every company is required to obtain in money or money's worth, consideration of a

value at least equal to the nominal value of the shares plus the whole of any premium. To issue shares 'at

par' is to obtain equal value, say, £1 for a £1 share.

Ooregum Gold Mining Co of India v Roper 1892

The facts: Shares in the company, although nominally £1, were trading, at a market price 12.5p. In an

honest attempt to refinance the company, new £1 preference shares were issued and credited with 75p

already paid, so the purchasers of the shares were actually paying twice the market value of the ordinary

shares. When, however, the company subsequently went into insolvent liquidation the holders of the new

shares were required to pay a further 75p.

If shares are allotted at a discount on their nominal value the allottee (and subsequent owners of the

shares) must nonetheless pay the full nominal value with interest at the appropriate rate. Any subsequent

holder of such a share who knew of the underpayment must make good the shortfall: s 588.

CONSIDERATION FOR SHARES

Partly-paid shares The no-discount rule only requires that, in allotting its shares, a company shall not

fix a price which is less than the nominal value of the shares. It may leave part of

that price to be paid at some later time. Thus £1 shares may be issued partly-paid –

75p on allotment and 25p when called for or by instalment. The unpaid capital

passes with the shares. If transferred, they are a debt payable by the holder at the

time when payment is demanded.

Underwriting fees A company may pay underwriting or other commission in respect of an issue of

shares if so permitted by its Articles. This means that, if shares are issued at par

the net amount received will be below par value. This is not a contravention of s

580 (prohibiting allotment of shares at a discount).

Bonus issue The allotment of shares as a 'bonus issue' is for full consideration since reserves,

which are shareholders' funds, are converted into fixed capital and are used to pay

for the shares.

Money's worth The price for the shares may be paid in money or 'money's worth', including

goodwill and know-how: s 582. It need not be paid in cash and the company may

agree to accept a 'non-cash' consideration of sufficient value. For instance, a

company may issue shares in payment of the price agreed in the purchase of a

property.

3.1 Private companies

Private companies may issue shares for inadequate consideration provided the directors are behaving

reasonably and honestly.

A private company may allot shares for inadequate consideration by acceptance of goods or services at

an over-value. This loophole has been allowed to exist because in some cases it is very much a matter of

opinion whether an asset is or is not of a stated value.

The courts therefore have refused to overrule directors in their valuation of an asset acquired for shares if

it appears reasonable and honest: Re Wragg 1897. However a blatant and unjustified overvaluation will be

declared invalid.

3.2 Public companies

There are stringent rules on consideration for shares in public companies.

More stringent rules apply to public companies.

(a) The company must, at the time of allotment, receive at least one quarter of the nominal value of

the shares and the whole of any premium: s 586.

(b) Any non-cash consideration accepted must be independently valued.

(c) Non-cash consideration may not be accepted as payment for shares if an undertaking contained in

such consideration is to be, or may be, performed more than five years after the allotment. This

relates to, say, a property or business in return for shares. To enforce the five year rule the law

requires that:

(i) At the time of the allotment the allottee must undertake to perform his side of the

agreement within a specified period which must not exceed five years. If no such

undertaking is given the allottee becomes immediately liable to pay cash for his shares as

soon as they are allotted

(ii) If the allottee later fails to perform his undertaking to transfer property at the due time he

becomes liable to pay cash for his shares when he defaults

(d) An undertaking to do work or perform services is not to be accepted as consideration. A public

company may, however, allot shares to discharge a debt in respect of services already rendered.

If a public company does accept future services as consideration the holder must pay the company

their nominal value plus any premium treated as paid-up, and interest at 5% on any such amount.

(e) Within two years of receiving its trading certificate, a public company may not receive a transfer

of non-cash assets from a subscriber to the memorandum. This is unless its value is less than

10% of the issued nominal share capital and it has been independently valued and agreed by an

ordinary resolution.

3.2.1 Valuation of non-cash assets

When a public company allots shares for a non-cash consideration the company must usually obtain a

report on its value from an independent valuer.

The valuation report must be made to the company within the six months before the allotment. On

receiving the report the company must send a copy to the proposed allottee and later to the Registrar.

The independent valuation rule does not apply to an allotment of shares made in the course of a takeover

bid.

3.3 Allotment of shares at a premium

If shares are issued at a premium, the excess must be credited to a share premium account.

Share premium is the excess received, either in cash or other consideration, over the nominal value of the

shares issued.

An established company may be able to obtain consideration for new shares in excess of their nominal

value. The excess, called 'share premium', must be credited to a share premium account.

The prohibition on offer of shares at a discount on nominal value is often confused with a company

issuing shares at a price below market value (which is not, provided there is no discount below nominal

value, prohibited).

If a company obtains non-cash consideration for its shares which exceeds the nominal value of the shares

the excess should also be credited to the share premium account.

3.3.1 Example: Using a share premium account

If a company allots its £1 (nominal) shares for £1.50 in cash, £1 per share is credited to the share capital

account, and 50p to the share premium account.

ILLUSTRATION

We will use the above example to illustrate the effects of the transaction on the balance sheet. The

company has issued 100 shares.

                           Before share issue After share issue

CASH                           100                     100

SHARE CAPITAL        100                      200

SHARE PREMIUM                                   50

                                     100                     250

The general rule is that reduction of the share premium account is subject to the same restrictions as

reduction of share capital. You should learn the fact that a company cannot distribute any part of its

share premium account as dividend.

3.4 Uses of the share premium account

Use of the share premium account is limited. It is most often used for bonus issues.

The permitted uses of share premium are to pay:

• Fully paid shares under a bonus issue since this operation merely converts one form of fixed

capital into another

• Issue expenses and commission in respect of a new share issue

QUESTION Increasing a company’s share capital

Explain the rule concerning issuing shares at a discount to their nominal value.

ANSWER

Shares may not be issued at a discount to their nominal value: s 580. However shares may be issued

'partly paid' with, for example, 75p of a £1 share paid up. The 25p balance remains a liability that the

shareholder must pay when demanded.

4 Distributing dividends

Various rules have been created to ensure that dividends are only paid out of available profits.

Key term A dividend is an amount payable to shareholders from profits or other distributable reserves.

4.1 Power to declare dividends

A company may only pay dividends out of profits available for the purpose.

The power to declare a dividend is given by the articles which often include the following rules.

RULES RELATED TO THE POWER TO DECLARE A DIVIDEND

The company in general meeting may declare dividends.

No dividend may exceed the amount recommended by the directors who have an implied power in their

discretion to set aside profits as reserves.

The directors may declare such interim dividends as they consider justified.

Dividends are normally declared payable on the paid up amount of share capital. For example a £1 share

which is fully paid will carry entitlement to twice as much dividend as a £1 share 50p paid.

A dividend may be paid otherwise than in cash.

Dividends may be paid by cheque or warrant sent through the post to the shareholder at his registered

address. If shares are held jointly, payment of dividend is made to the first-named joint holder on the

register.

Listed companies generally pay two dividends a year; an interim dividend based on interim profit figures,

and a final dividend based on the annual accounts and approved at the AGM.

A dividend becomes a debt when it is declared and due for payment. A shareholder is not entitled to a

dividend unless it is declared in accordance with the procedure prescribed by the articles and the declared

date for payment has arrived.

This is so even if the member holds preference shares carrying a priority entitlement to receive a

specified amount of dividend on a specified date in the year. The directors may decide to withhold profits

and cannot be compelled to recommend a dividend.

If the articles refer to 'payment' of dividends this means payment in cash. A power to pay dividends in

specie (otherwise than in cash) is not implied but may be expressly created. Scrip dividends are

dividends paid by the issue of additional shares.

Any provision of the articles for the declaration and payment of dividends is subject to the overriding rule

that no dividend may be paid except out of profits distributable by law.

4.2 Distributable profit 12/07

Distributable profits may be defined as 'accumulated realised profits ... less accumulated realised losses'.

'Accumulated' means that any losses of previous years must be included in reckoning the current

distributable surplus. 'Realised' profits are determined in accordance with generally accepted accounting

principles.

Profits available for distribution are accumulated realised profits (which have not been distributed or

capitalised) less accumulated realised losses (which have not been previously written off in a reduction or

reorganisation of capital).

The word 'accumulated' requires that any losses of previous years must be included in reckoning the

current distributable surplus.

A profit or loss is deemed to be realised if it is treated as realised in accordance with generally accepted

accounting principles. Hence, financial reporting and accounting standards in issue, plus generally

accepted accounting principles (GAAP), should be taken into account when determining realised profits

and losses.

Depreciation must be treated as a realised loss, and debited against profit, in determining the amount of

distributable profit remaining.

However, a revalued asset will have deprecation charged on its historical cost and the increase in the

value in the asset. The Companies Act allows the depreciation provision on the valuation increase to be

treated also as a realised profit.

Effectively there is a cancelling out, and at the end only depreciation that relates to historical cost will

affect dividends.

ILLUSTRATION

Suppose that an asset purchased for £20,000 has a 10 year life. Provision is made for depreciation on a

straight line basis. This means the annual depreciation charge of £2,000 must be deducted in reckoning

the company's realised profit less realised loss.

Suppose now that after five years the asset is revalued to £50,000 and in consequence the annual

depreciation charge is raised to £10,000 (over each of the five remaining years of the asset's life).

The effect of the act is that £8,000 of this amount may be reclassified as a realised profit. The net effect is

that realised profits are reduced by only £2,000 in respect of depreciation, as before.

If, on a general revaluation of all fixed assets, it appears that there is a diminution in value of any one or

more assets, then any related provision(s) need not be treated as a realised loss.

The Act states that if a company shows development expenditure as an asset in its accounts it must

usually be treated as a realised loss in the year it occurs. However it can be carried forward in special

circumstances (generally taken to mean in accordance with accounting standards).

4.3 Dividends of public companies

A public company may only make a distribution if its net assets are, at the time, not less than the

aggregate of its called-up share capital and undistributable reserves. It may only pay a dividend which

will leave its net assets at not less than that aggregate amount.

A public company may only make a distribution if its net assets are, at the time, not less than the

aggregate of its called-up share capital and undistributable reserves. The dividend which it may pay is

limited to such amount as will leave its net assets at not less than that aggregate amount: s 831.

Undistributable reserves in s 831 are defined as:

(a) Share premium account

(b) Capital redemption reserve

(c) Any surplus of accumulated unrealised profits over accumulated unrealised losses (known as a

revaluation reserve). However a deficit of accumulated unrealised profits compared with

accumulated unrealised losses must be treated as a realised loss

(d) Any reserve which the company is prohibited from distributing by statute or by its constitution or

any law.

ILLUSTRATION

Suppose that a public company has an issued share capital (fully paid) of £800,000 and £200,000 on

share premium account (which is an undistributable reserve). If its assets less liabilities are less than £1

million it may not pay a dividend. If however its net assets are say £1,250,000 it may pay a dividend but

only of such amount as will leave net assets of £1 million or more, so its maximum permissible dividend

is £250,000.

The dividend rules apply to every form of distribution of assets except the following

• The issue of bonus shares whether fully or partly paid

• The redemption or purchase of the company's shares out of capital or profits

• A reduction of share capital

• A distribution of assets to members in a winding up

You must appreciate how the rules relating to public companies in this area are more stringent than the

rules for private companies.

QUESTION Distribution of profit

What are the main rules affecting a company's ability to distribute its profits as dividends?

ANSWER

Dividends may only be paid by a company out of profits available for the purpose. There is a detailed code

of statutory rules which determines what are distributable profits. The profits which may be distributed as

dividend are accumulated realised profits, so far as not previously utilised by distribution or capitalisation,

less accumulated realised losses, so far as not previously written off in a reduction or reorganisation of

capital duly made.

The above rules on distributable profits apply to all companies, private or public. A public company is

subject to an additional rule which may diminish but cannot increase its distributable profit as determined

under the above rules.

A public company may only make a distribution if its net assets are, at the time, not less than the

aggregate of its called-up share capital and undistributable reserves. The dividend which it may pay is

limited to such amount as will leave its net assets at not less than that aggregate amount.

4.4 Relevant accounts

The profits available for distribution are generally determined from the last annual accounts to be

prepared.

Whether a company has profits from which to pay a dividend is determined by reference to its 'relevant

accounts', which are generally the last annual accounts to be prepared: s 836.

If the auditor has qualified their report on the accounts they must also state in writing whether, in their

opinion, the subject matter of his qualification is material in determining whether the dividend may be

paid. This statement must have been circulated to the members (for a private company) or considered at a

general meeting (for a public company).

A company may produce interim accounts if the latest annual accounts do not disclose a sufficient

distributable profit to cover the proposed dividend. It may also produce initial accounts if it proposes to

pay a dividend during its first accounting reference period or before its first accounts are laid before the

company in general meeting. These accounts may be unaudited, but they must suffice to permit a proper

judgement to be made of amounts of any of the relevant items.

If a public company produces initial or interim accounts they must be full accounts such as the company

is required to produce as final accounts at the end of the year. They need not be audited. However the

auditors must, in the case of initial accounts, satisfy themselves that the accounts have been 'properly

prepared' to comply with the Act. A copy of any such accounts of a public company (with any auditors'

statement) must be delivered to the Registrar for filing.

4.5 Infringement of dividend rules

In certain situations the directors and members may be liable to make good to the company the amount

of an unlawful dividend.

If a dividend is paid otherwise than out of distributable profits the company, the directors and the

shareholders may be involved in making good the unlawful distribution.

The directors are held responsible since they either recommend to members in general meeting that a

dividend should be declared or they declare interim dividends.

(a) The directors are liable if they declare a dividend which they know is paid out of capital.

(b) The directors are liable if, without preparing any accounts, they declare or recommend a dividend

which proves to be paid out of capital. It is their duty to satisfy themselves that profits are available.

(c) The directors are liable if they make some mistake of law or interpretation of the constitution

which leads them to recommend or declare an unlawful dividend. However in such cases the

directors may well be entitled to relief as their acts were performed 'honestly and reasonably'.

The directors may however honestly rely on proper accounts which disclose an apparent distributable profit

out of which the dividend can properly be paid. They are not liable if it later appears that the assumptions or

estimates used in preparing the accounts, although reasonable at the time, were in fact unsound.

The position of members is as follows.

• A member may obtain an injunction to restrain a company from paying an unlawful dividend.

• Members voting in general meeting cannot authorise the payment of an unlawful dividend nor

release the directors from their liability to pay it back.

• The company can recover from members an unlawful dividend if the members knew or had

reasonable grounds to believe that it was unlawful, s847.

• If the directors have to make good to the company an unlawful dividend they may claim indemnity

from members who at the time of receipt knew of the irregularity.

• Members knowingly receiving an unlawful dividend may not bring an action against the directors.

If an unlawful dividend is paid by reason of error in the accounts the company may be unable to claim

against either the directors or the members. The company might then have a claim against its auditors if

the undiscovered mistake was due to negligence on their part.

Re London & General Bank (No 2) 1895

The facts: The auditor had drawn the attention of the directors to the fact that certain loans to associated

companies were likely to prove irrecoverable. The directors refused to make any provision for these

potential losses. They persuaded the auditor to confine his comments in his audit report to the

uninformative statement that the value of assets shown in the balance sheet 'is dependent on realisation'.

A dividend was paid in reliance on the apparent profits shown in the accounts. The company went into

liquidation and the liquidator claimed from the auditor compensation for loss of capital due to his failure to

report clearly to members what he well knew affecting the reliability of the accounts.

Decision: The auditor has a duty to report what he knows of the true financial position: otherwise his audit

is 'an idle farce'. He had failed in this duty and was liable.

CHAPTER ROUNDUP

• The rules which dictate how a company is to manage and maintain its capital exist to maintain the delicate

balance between the members' enjoyment of limited liability and the creditors' requirements that the

company shall remain able to pay its debts.

• Reduction of capital can be achieved by: extinguishing/reducing liability on partly-paid shares;

cancelling paid-up share capital; or paying off part of paid up share capital. Court confirmation is

required for public companies. The court considers the interests of creditors and different classes of

shareholder. There must be power in the articles and a special resolution.

• In issuing shares, a company must fix a price which is equal to or more than the nominal value of the

shares. It may not allot shares at a discount to the nominal value.

• Private companies may issue shares for inadequate consideration provided the directors are behaving

reasonably and honestly.

• There are stringent rules on consideration for shares in public companies.

• If shares are issued at a premium, the excess must be credited to a share premium account.

• Use of the share premium account is limited. It is most often used for bonus issues.

• Various rules have been created to ensure that dividends are only paid out of available profits.

• Distributable profits may be defined as 'accumulated realised profits ... less accumulated realised losses'.

'Accumulated' means that any losses of previous years must be included in reckoning the current

distributable surplus. 'Realised' profits are determined in accordance with generally accepted accounting

principles.

• A public company may only make a distribution if its net assets are, at the time, not less than the

aggregate of its called-up share capital and undistributable reserves. It may only pay a dividend which

will leave its net assets at not less than that aggregate amount.

• The profits available for distribution are generally determined from the last annual accounts to be

prepared.

• In certain situations the directors and members may be liable to make good to the company the amount

of an unlawful dividend.

QUICK QUIZ

1 Where application is made to the court for confirmation of a reduction in capital, the court may require

that creditors should be invited by advertisement to state their objections. In which of the following ways

can the need to advertise be avoided?

Select all that apply.

A Paying off all creditors before application to the court

B Producing a document signed by the directors stating the company's ability to pay its debts

C Producing a guarantee from the company's bank that its existing debts will be paid in full

D Renouncement by existing shareholders of their limited liability in relation to existing debts

2 A share premium account can be used for bonus issues of shares or issue costs for new share issues.

True

False

3 Fill in the blanks in the statements below.

Distributable profits may be defined as ……………….. ……..…. profits less ……………….. ………….

losses.

4 If a company makes an unlawful dividend, who may be involved in making good the distribution?

A The company only

B The directors only

C The shareholders only

D The company, the directors and the shareholders

5 Give four examples of undistributable reserves.

6 What normally are a company's relevant accounts in the context of payments of dividends?

ANSWERS TO QUICK QUIZ

1 A and C. The only guarantee that the courts will accept is from the company's bank.

2 True. Both are acceptable uses for the share premium account.

3 Distributable profits may be defined as accumulated realised profits less accumulated realised losses.

4 D. All three may be liable.

5 Share premium account

Capital redemption reserve

A surplus of accumulated unrealised profits over accumulated unrealised losses (revaluation reserve)

Any reserve which the company is prohibited from distributing by statute or by its constitution or any law.

6 The relevant accounts are the last accounts to have been prepared and laid in general meeting.