Capital Maintenance

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Outline
Introduction to capital maintenance Receiving proper value on share issues Returning funds to s/h:
Dividends/distributions Capitalisation of profits Reduction of share capital Purchase of own shares by the company Redemption of shares by the company Funding the purchase/redemption

Financial Assistance
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Introduction
Need for capital maintenance
Accurate picture of company finances Protect creditors Protect shareholders

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Receiving Proper Value

No Discount
Ooregum Gold Mining Co s580 CA

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Receiving Proper Value

Payment in kind
E.g goods/services Re Wragge Ltd: valued in good faith NB: public companies ss593 & 594 CA independent valuation

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Returning Funds to Shareholders: Dividends etc

General Rule. e.g: Sales (income) Less: Raw material 100,000 Expenses 30,000 Profits 150,000

130,000 20,000

Tax payable on 20,000 and the rest available distributable

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Returning Funds to Shareholders: Dividends etc

CA
no reference to dividend Refers to distribution

S830(1) CA: no distribution except out of profits

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Returning Funds to Shareholders: Dividends etc

S829 (1)&(2) CA distribution means any distribution whether or not cash EXCEPT: e.g:
Issue of fully/partly paid bonus shares Purchase/redemption of cos own shares Return of capital in a properly authorised reduction Distribution of assets to members on winding up

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Returning Funds to Shareholders: Dividends etc

Dividends paid from distributable profits

profits after taking account of any losses

Complicated accounting rules which are even stricter for plcs about type of losses to take account of .very basic e.g
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Returning Funds to Shareholders: Dividends etc

Yr 1: trading loss = 10,000 Yr 2: trading loss = 5,000 Yr 3: profit = 1,000

Yr 4 it must make a profit of more than

.. to payout any dividends
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Returning Funds to Shareholders: Dividends etc

Breach of the Rules
Directors
Bairstow v Queens Moat Houses

Defence if director can show reasonable care taken

Dovey v Cory

Consequences for shareholder: s847 CA

constructive trustee: Precision Dippings Ltd v Precision Dippings Marketing Ltd
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Returning Funds to Shareholders: Dividends etc

Disguised Payments
Re Halt Court may ask:
Was proper procedure for awarding remuneration followed? Was there a fraud on the minority shareholders/creditors Was payment genuine remuneration or disguised return of capital?

Aveling Barford...
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Returning Funds to Shareholders: Dividends etc

Aveling Barford

Lee
AB Ltd
Property worth

P Ltd

650K

350K

1.52m

X paid 1.52m to P Ltd which paid it out by way ofLaw School dividend to Lee

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Returning Funds to Shareholders: Dividends etc

Procedure for declaring dividends:
Model Art 30-35 (private); Model Art 70 - 77 (plc) Directors decide Approval by members

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Returning Funds to S/Hs: Capitalising profits

Profits paid by issuing fully paid shares Why capitalise profits? Model Art 36 (private); 78 (plc)

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EG: Capitalisation
K Ltd
Issued s/c 100 divided into 100 ordinary shares of 1 each Each share now worth 2.00 A holds 40; B holds 50 and C holds 10 Company makes a profit of 20K How many new fully paid up shares will each get?
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Returning Funds to S/Hs: Reduction of share capital

Why reduce it? E.g.:
To comply with law relating to distributions Has more capital than it needs Share capital already issued not fully paid BUT co has sufficient capital

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Returning Funds to S/Hs: Reduction of share capital

Procedure for reduction ss641-657 CA
Private company
Solvency statement or court order Special resolution

Public:
Solvency statement & special resolution Court makes order on such terms it thinks fit Interests of creditors Interests of different classes of shareholders...

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Returning Funds to S/Hs: Reduction of share capital

Determining interests of class of shareholders:
British and American Trustee Achieve fairness: repay in order they would rank on a winding up for repayment of capital Re Chatterley-Whitfield Collieries Ltd

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Returning Funds to S/Hs: Purchase of own shares

Basic Rule: Trevor v Whitworth S658 CA: rule not so strict now Why would a company want purchase its own shares back from the shareholders?
Marketability in a private company Family company: s/h dies or is also a director and wants to resign/retire other s/hs cant by him out Shareholder disputes Reorganisation of capital

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Returning Funds to S/Hs: Purchase of own shares

S658(1): a limited company must not acquire its own sharesexcept in accordance[with CA] S690 CA allows own purchase:
in certain circumstances if co has authority to do so ( note articles can restrict or prohibit) if shares are fully paid up if after purchase there are ordinary shares in issue if there is shareholder approval
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Returning Funds to S/Hs: Purchase of own shares

Market purchase s701 CA
e.g. LSE ( must comply with listing rules/stock exchange rules) Member approval by ordinary resolution Resolution to state:
Max number of shares Max-min price to be paid Date for resolution to expire

Can revoke, vary, renew authority Resolution file at Cos House

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Returning Funds to S/Hs: Purchase of own shares

off- market purchase s694
Need advance authority - specific contract Authority given by special resolution
Authority can be varied by special resolution Plcs authority no more than 18months Private cos no time limit on resolution

Display contract for 15 days before general meeting Can use written resolution private company Votes of s/h whose shares being purchased are ignored

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Returning Funds to S/Hs: Purchase of own shares

Payment
Timing Form: BDG Roof Bond

After purchase
Shares cancelled File return + resolution at Cos House Copy contract at reg office for 10 years If listed co and 10%+ of that class purchased then comply with listing rules
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Returning Funds to S/Hs: Redemption of own shares

Redeemable shares General rule s658 CA applies Redemption only if shares fully paid Procedure basically same as own share purchase

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Returning Funds - Financing the Purchase or Redemption

Private company
Profits or capital?

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Returning Funds - Financing the Purchase or Redemption

Private company using capital
Must be no restrictions in articles Special resolution Not more than week before resolution directors make statement regarding cos financial position + Auditors report If statement without reasonable grounds:
Criminal penalties Consequences if co insolvent liquidation
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Returning Funds - Financing the Purchase or Redemption

Private company using capital cont.
Stat dec and auditors report at meeting File resolution at companies house Within 1 week of passing resolution advertise in:
Gazette and National newspaper or notify creditors by letter

Creditors/members (who did not vote in favour have 5 weeks to apply to court)
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Returning Funds - Financing the Purchase or Redemption

Private company using capital cont.
Payment not before 5 weeks nor later than 7 of date of resolution Notify redemption to companies house

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Returning Funds - Financing the Purchase or Redemption

If Plc can ONLY use:
Distributable profits OR A fresh issue of shares

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Financial Assistance
What is financial assistance? The General Prohibition
678(1) makes it unlawful BEFORE or AT time of acquisition S678(3) makes it unlawful if given AFTER acquisition for discharging a liability incurred for the purchase
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Financial Assistance
S677(1):definition of financial assistance (a) Gift (b) Security, guarantee etc (c) Fulfilling obligations (d) sweep-up forbids it where net assets reduced to a material extent or there are no net assets
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Financial Assistance
Belmont

Heald v OConnor
e.g: of s677(1)(b)

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Financial Assistance
Exceptions to s677 set out in s678(2):
If principal purpose of the companys action is not to give financial assistance; OR Financial assistance given is an incidental part of some larger purpose of the company AND Is given in good faith/best interests of co

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Financial Assistance
Brady v Brady
S678(2) exception did not apply because the principal purpose of the loan was to acquire shares

Unlawful financial assistance

NB: (case pre CA 2006 so used whitewash procedure)
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Financial Assistance
Some other exceptions set out in s681 and s682 importantly note:
S681: distribution of a dividend

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Financial Assistance
Penalties:
Criminal & civil officers
S680 CA Company Directors Disqualification Act 1986
Re Continental Assurance Co

Civil for company

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Financial Assistance
Some conclusions:
If financial assistance not yet given and giving is unlawful cannot enforce agreement: Brady v Brady If unlawfully given:
By way of charge/guarantee recipient of it cannot enforce the agreement: Heald By way of cash the Co must to sue to recover it

If provision for giving financial assistance is illegal can sever that part and enforce rest of agreement

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