Maintenance of Share Capital
Cases referred to in this section:
Trevor v Whitworth (1887) 12 App Cas 409, HL
Once a company has received payment for the shares it has issued, it may not return that payment to its members other than in the proper course of distribution of assets in a winding up or via some other lawful exception to the rule (Trevor v Whitworth (1887)).
A company may wish to reduce capital and may do so in three different ways:
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In order to benefit members, a company may decide to cancel some or all of the uncalled capital and so reduce members' liability for this
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Where a company's net assets are worth less than the value of the issued share capital, they may decide to cancel paid up share capital (enabling them to pay dividends on their shareas rather than having to replace the lost capital by retaining profits)
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A company may pay part of the paid up share capital out of surplus assets. In other words, where a company holds assets surplus to the needs of its enterprise, it may return a cash sum to each member for each share held and at the same time will reduce the nominal value of the share by that amount. This is not particularly good for creditors since it reduces their 'buffer'.
Under Section 135 of the Companies Act, a company may reduce its share capital provided that it is able to do so by its articles, a special resolution is passed and the court confirms the reduction. The court's involvement is to protect the interests of creditors and shareholders alike and under Section 136 the Court must be satisfied that the Company can pay its debts after the reduction.
Other ways that the company's share capital may be reduced are:
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Under s.53 a public company may resolve to reregister as private. If the members object the court may order the company to purchase the objector's shares and reduce its capital
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Under s. 459, the Court may make a similar order when a member brings an unfair prejudice action
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Under s.146 any forfeiture or surrender of the shares in a public company is treated as a reduction of capital as the shares must be cancelled.
Where the net assets of a public company are worth half or less than its called up share capital, a serious loss of capital is said to have occurred and the diectors must call a extraordinary general meeting within 28 days from the first day it is known to a director of the company about the loss - the meeting itself must be held no later than 56 days from the same day.
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