The Capital Maintenance Rule & Directors - A Guide for Corporate Advisors

Introduction

A company’s share capital (and other capital accounts) is sometimes known as ‘the creditors’ buffer’. In practice, the creditors’ buffer may only be £100 or less. But nevertheless, it is there for the benefit of the creditors, not the members. And there are strict rules that apply to its use.

As ever, there are exceptions - and these become more intelligible once you see the practical reasons behind them. This session aims to demystify the exceptions, and to show how they can be used to benefit a company.

The four main areas of capital maintenance are:

• The purchase by a company of its own shares
• Reduction of capital
• Financial assistance for the acquisition of shares
• Dividends

Correct following of the rules avoids problems for directors. Dividends, however, are the most problematic. Not only are there subtle rules relating to the calculation of distributable profits, but there is potential liability for members, directors and auditors alike if dividends are paid when they should not have been.

The courts are full of cases relating to improperly paid dividends or payments dressed up as dividends, thus exposing directors in particular to action against them, particularly if their companies later become insolvent. In addition, over-generous dividend policy is alleged to have led to the collapse of certain high-street stores.

What You Will Learn

This live and interactive course will cover the following:

• What the theory of capital maintenance means, and why it matters
• How to buy back or redeem shares safely, and why a company would do this
• Why companies reduce their capital and how to do so properly
• Permissible and impermissible financial assistance
• The dangers of paying unjustified dividends, particularly if insolvency is looming
• Who may be liable for improper dividends or other unauthorised payments, particularly if their company later goes into administration or liquidation
• Key cases:
• Re Interactive Media Group [2024] - Improper reduction of capital
• BTI 2014 LLC v Sequana SA [2022] - Holding company and directors’ potential liability for a dividend

Recording of live sessions: Soon after the Learn Live session has taken place you will be able to go back and access the recording - should you wish to revisit the material discussed.