The capital maintenance rules are designed to protect the interests of creditors of a company by ensuring that capital is maintained as a secure fund which cannot be distributed to shareholders unless it is distributed following a winding up. This blog shall briefly examine the classification of share capital before considering the capital maintenance rules and reducing share capital.
The share capital of a company represents the shareholders’ investment in the company. It includes amounts received from the issue of shares together with any amounts held in the company’s share premium account or other capital reserves.
Authorised Share Capital
In Ireland, each company with a share capital has an amount of authorised share capital which is stated in the company’s Constitution. The authorised share capital represents the total nominal value of shares which may be issued by the company. Since the introduction of the Companies Act 2014, a Private Company Limited by Shares (LTD) can opt to have an unlimited authorised share capital, enabling a company to issue more shares with less restriction.
Issued Share Capital
Issued share capital is the total amount of shares which have been issued to the shareholders.
Called-up Share Capital
The called-up share capital is the total amount of consideration that the shareholders are required to pay to the company for their shares.
Paid-up Share Capital
The paid-up share capital is the amount of consideration actually contributed for a company’s shares.
Share Capital & Share Premium Accounts
All share capital accrued through the allotment of shares must be kept by the company in a share capital account, separate from all other company funds. Shares can be issued at a price above their nominal value which is known as a share premium. This money must also be kept in a separate account known as a ‘share premium account’. Money in the share capital and share premium accounts are unavailable for distribution and are subject to capital maintenance rules.
Capital Maintenance Rules
Capital maintenance rules exist so that the capital of a company is preserved for the purpose of paying its creditors in the event of a winding-up procedure. This ensures that only a company’s profit can be distributed to shareholders while business is ongoing. Distributions cannot be made to shareholders from share capital accounts.
Protection For Shareholders
Under the current Companies Acts, shareholders of PLC’s are offered some protection from loss of capital through the course of trading. This protection is provided by Section 1111 (1) of the Companies Act 2014 which requires an extraordinary general meeting to be called if a PLC’s net assets are less than or equal to half of its called-up share capital.
Reducing Company Share Capital
A company may reduce its share capital, but only when it meets a set of requirements. In order to approve the reduction in private limited companies, designated activity companies, companies limited by guarantee and unlimited companies a special resolution must be passed by the company. (For a PLC, High Court approval is required).
A declaration must also be made at the meeting of directors stating:
• The circumstances and nature of the transaction;
• The persons involved in the transaction;
• The company’s assets and liabilities (within 3 months of the declaration); and
• That the declarants have made all necessary enquiries into the company and believe that the company will not have any extraordinary future liabilities within 12 months of making the declaration.
The Declaration must also be accompanied by a report of the statutory auditor of the company which states that the declaration is not unreasonable.
Important To Understand The Rules
In summary, capital maintenance rules exist to ensure that capital is maintained in accordance with the regulations stipulated by company law. It is very important that the directors of the company understand such rules and ensure that the required funds are maintained by the company at all times.
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