Explain The Doctrine Of Capital Maintenance And Capital Reduction 1 / 2

Capital Maintenance prevents members withdrawing their capital without restriction

The idea is that there's always some money to help pay creditors - what we call the creditors' buffer.

The creditors' buffer
This is basically undistributable reserves - meaning an amount that can't be taken by shareholders via dividends or share repurchases.

Capital Reduction

Capital can be reduced in 3 ways:

  • Writing off unpaid calls on issued share capital

  • Removing excess capital - by giving it to fully paid shareholders

  • Cancelling paid up share capital that has been lost

How to reduce capital

Per the CA 2006 private companies may reduce capital without court approval by following the procedures below:

  1. Pass a special resolution

  2. Produce a statement of solvency within 15 days

Public companies must get court approval for any reduction of capital and allows any member or creditor to object.

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