Question

The concept of capital maintenance is geared substantially towards the protection of creditors of the company who in the eyes of the law, have an interest in the paid up share capital and other assets of the company. A company is prohibited from reducing its issued share capital. Thus, a company is prohibited from giving financial assistance as one of the rule to maintain the companys capital.

Based on the statement above critically discuss THREE (3) transactions that constitute financial assistance.

Support your answer with relevant statutory provisions of the Companies Act 2016 and decided cases.

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Answer 1

Legally the Company cannot reduce its authorise share capital once its approved but may cancel the portion of share capital and reduce the share capital by the amount of its shares so cancelled i.e. called as diminution of share capital (Authorized Share Capital).

Other means of reducing share capital are..

• Returning of surplus to shareholders;
• Eliminating losses, which may be preventing the payment of dividends;
• May be as part of scheme of compromise or arrangements;
• To simply capital structure

Hence in certain cases we can reduce our share capital with the prior approval from tribunal.

Such reduction is covered under section 66 of the Companies Act, 2013