Beruflich Dokumente
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Capital
Group IV
Sainaj Timalsina (15035)
Deepika Acharya(15001)
Pranjal Neuapne(15025)
Karun Pandey(15026)
Samish Dhakal(15011)
Rajpal KC(15014)
Doctrine of Capital Maintenance
Facts: The MOA of the company(James Schofield & Sons Limited) didnt authorize to
purchase its own shares. Whitworth sold his shares to the company(1880).. He was left to
pay . The company went into liquidation (1884). Trevor was the liquidator of the company
.Then Whitworth filed the case. The court of appeal said decided Trevor to pay. Then Trevor
appealed.
Decision (House of Lords):The company acted outside its power. The purchase of its own
shares was deemed void and Whitworth claim for the balance failed.
Rationale: The capital of limited liability companies should be maintained to satisfy creditor
claims. Creditors assume risk in their outlay and law ranks them ahead of shareholders when
capital is returned.
Developed Rule: Company is generally prohibited to reduce its share capital because it will
prejudice the interests and rights of creditors.
Flit crofts case( Re Exchange Banking
Company) (1882)
Parties:
Claimant: Liquidator
Respondent: Directors
Facts: The directors showed profit of the company and proposed for dividends even the
company had bad debts and wasnt at profit. General meeting of shareholders declared
dividends When the company went into liquidation, the liquidator sought an order that the
directors should refund the entire amount of the dividends.
Decision: The directors were liable not only to pay back the dividends which they had
received, but also to refund the company in respect of the dividends which they had paid to
the other shareholders.
As Cotton LJ put it: directors are in the position of trustees, and are liable not only for what
they put into their own pockets, but for what they in breach of trust pay to others.
Facts: Mr Lee controlled and owned both Aveling Barford ltd and Perion ltd. Perion ltd was a
trust company for the benefit of Lees family. Aveling Barford wasnt able to earn profits so
it sold some of its assets to Perion at undervalue. Perion Ltd later sold the assets to other
company in a profit violating the agreement not to resale it. Aveling ltd went into liquidation.
The Liquidator of Aveling Barford filed the case claiming that Perion wasnt acting as
constructive trustee.
Issue: Whether the company would sell its assets at an unprofitable state?
Decision: The main claim of Aveling Barford ltd wasnt addressed. The court held the
company can't reduce its capital and the directors of Aveling Ltd werent supposed to do it.
It seemed like dressed up distribution". The transaction was held to be void as an
unauthorized return of capital.
Pranjal Neupane
Minimum capital requirement
The minimum capital requirement for
registration of a public company is Rupees 10
million.
Such requirement is not applied in the case of
private company.
Section 11 of the Company act states The
paid up capital of a public company shall be a
minimum of ten million rupees, except as
provided in the in the prevailing law.
Reduction of Share Capital
A company cannot simply reduce its share capital except in
accordance with section 57 and 58 of the act.
Section 57(1) of the act requires adopting a special resolution
regarding reduction of share capital at its general meeting and
obtaining approval of the court.
(2) After obtaining the approval of the court, the company may
reduce its share capital as follows:
a. By reducing the capital to such amount as has been paid up where
calls for payment of amount on shares are not fully paid.
b. Paying back any paid up share capital
c. Devaluating the face value of shares where the company has
sustained a big loss or suffered a natural calamity.
Procedures for obtaining approval of
court to reduce share capital (Section
1. Special resolution for reducing share capital and a
petition to the court for58)
an order confirming the
reduction.(Subsection 1)
2. Publishing a public notice in a daily newspaper of
national circulation at least three times before the
hearing, stating the venue and date of hearing.(2)
3. Every person entitled to a debt/claim be entitled to
submit claims and objection to the reduction of share
capital of the company.(3)
4. Submission of real and true list of creditors of the
company to the court by the director or company
secretary.(4)
Continue
5. If the company admits the full amount of debts or claims made by
creditors and agrees to make provision of moneys required to pay such amount
the court may issue order confirming reduction. (5)
6. If any false statement or omission is found in the list of creditors submitted to
court, the director who submits such list and the officer who signs such list shall
be liable to punishment. (7) and (12)
7. The court may make the order for the reduction of share capital if it is
satisfied that the creditors consent to the reduction have been obtained or their
debts have been discharged or have been secured. The court may specify
appropriate terms and conditions. (8)
8. Such order of court shall be deemed to have ipso facto been incorporated in
the MOA and AOA. (11)
9. When the share capital reduction is authorized, the director or company
secretary shall mention and authenticate that matter in each certificate issued
by the company.
Distribution of dividend is only out of
profits
S 182 (5) states that A company shall not pay or
distribute a dividend in any other manner except out of
the amounts of profits set aside for the distribution of
dividend.
A company shall fully deduct the pre operation
expenses, any amount required to be paid or set aside
out of the profits under the prevailing law, the amount
required to be depreciated, the amount of
accumulated loss in previous financial years before
paying or declaring dividends out of profits. (6)
Allotting of shares at a discount
A company cannot issue or sell its shares at discount
except in following conditions:
1. Issuing shares pursuant to a capital restructuring
scheme of the company.
2. Converting loans borrowed by the company into
shares with the consent of the creditors.
3. Issuing shares pursuant to an employee share scheme.
4. Other conditions/purposes as approved by the office.
Section 64
Valuation of assets used to purchase
shares
If shares are issued to any person or promoter for
non- cash assets in the case of public company
such assets must be valuated by certified
engineer or accountant. (Section 18(3))
The criteria for valuation shall be as prescribed
and if such criteria are not prescribed the person
evaluating such property shall mention the
criteria. (S18(4))
Financial Assistance to buy its own
shares
Section 62 prohibits a company from
providing any loan or financial assistance to
any person for purchasing its own shares or
the shares of its holding company.
However, a company can provide loans to any
employees of the company to purchase the
fully paid up shares of that company under a
scheme of selling shares to its employees.
Right to pre-emption
Section 56(8) The existing shareholder shall
have the first right to subscribe to the new
allotment of shares.
A time limit of at least thirty five days shall be
given to the existing shareholders to subscribe
the shares. (Section 56(11))
Prohibition on purchase by company
of its own shares
Section 61 of the Companies act prevents
company from purchasing its own shares.
However the company can buy back its own
shares out of its free reserves available for being
distributed as dividends in circumstances such as:
1. If Shares issued by the company are fully paid up.
2. Buy back of shares is authorized by the AOA of
the company.
3. Adoption of the special resolution at the general
meeting authorizing the buy back.
Charge Enforceable
For a charge to be enforceable, it must be
recognized and enforceable under the
Companies Act. For example Lien on shares
The Companies Act,1994
(Bangladesh)
KARUN PANDEY
Contemporary Statutory law
Governing the Doctrine of Capital
Maintenance
1) Financial assistance:
58 (2) : No company limited by shares other than private
company or a subsidiary company of a public company,
shall give whether directly or indirectly, and whether by
means of a loan guarantee the provision of security or
otherwise any financial assistance for the purpose of or in
connection with a purchase made or to be made by any
person of any shares in the company:
Sec 172 Duty to promote the success of the company for the
benefit of its members.
Purchase of Own Shares
The general rule is that a limited company may
not acquire its own shares by purchase,
subscription or otherwise, except as permitted.
Part 18 CA 2006 brings together the current
methods by which a limited company can acquire
its own shares and section 658 CA 2006 prohibits
the acquisition by a limited company of its own
shares except in accordance with the provisions
of that Part.
One advantage of a company reducing its share capital by
purchasing its own shares is that the purchase price for the
shares concerned may exceed the amount of capital that
those shares represent.
The key changes to the capital maintenance rules
introduced by the CA 2006, being the repeal of the
statutory prohibition on the giving of financial assistance by
private companies and the new out of court reduction of
capital procedure for private companies, are to be
welcomed. Whilst it will be interesting to see how market
practice develops in relation to the new out of court
reduction procedure available to private companies, the
changes should simplify many transactions, shorten
transaction timetables and reduce costs.
Provisions In U.S & Conclusion
By :Rajpal K.C
In U.S
There are no rules prohibiting limited
companies from buying self owned shares.
Companies are generally free to reduce their
share capital without the consent of the
Court.
So, we can say that The Doctrine of Capital
Maintenance doesnt apply in U.S.
Conclusion