5.4 Maintenance of capital


The capital of the Company whether paid up or not is regarded by the court as constituting at least in principle a permanent fund available to the creditors of the Company. This capital is required for protection of creditors since the liability of shareholders is in general limited to the nominal amount of shares taken up by them and thus the only fund of last resort available to creditors is the issued capital. It has therefore been necessary for the court and legislature to provide that the full value of that capital be raised and maintained as a fund so far as ordinary risk of business will allow. The following rules relate to raising of capital:

  1. The issue of shares at a discount is in principle prohibited as this would mislead persons dealing with Company into believing that the full value of the issued capital has been received by Company.
  2. When shares are issued at a premium, the premium is transferred to a share premium account and this can only be applied for purpose provided by the Act
  3. Payment for shares shall be in money or money’s worth and in case of Public Limited Companies it must not consist of an undertaking to work or perform services
  4. A public limited company may not allot shares until it has received at least a quarter of its nominal value and the whole of the premium
  5. A public limited company may not allot any shares for a consideration other than cash without an evaluation report in respect of the consideration

Rules Governing Maintenance of Capital

  1. Reduction of issued capital must comply with the strict legal requirements including confirmation by the court
  2. A Company will only purchase or redeem its shares out of distributable profits or out of a fresh issue shares to raise cash for that purpose.
  3. A Company may not issue shares to a nominee of its own
  4. A public limited company must sell or cancel any of its shares acquired by itself by forfeiture or surrender
  5. A public limited company may not in principle finance the acquisition of its own shares
  6. Dividends can only be paid out of profits and not out of capital