Capital Protection Rules
In one sense, the capital of the company is a fund available for creditors. It is not available to shareholders, other than on winding up after all creditors/ debt holders have been paid in full. There are capital protection rules in company law which seek to protect the company’s capital.
The capital protection rules prohibit certain transactions which would otherwise reduce capital. Capital protection rules were initially developed at common law. They have been reinforced in more specific terms by legislation.
The capital protection rules seek to preserve the integrity of contributed capital. They are not necessarily effective in providing a capital fund for outsiders as the capital required to be contributed to a private limited company may be as low as €1.00 or less. There is no obligation as such to replenish lost or negative capital, although it may inhibit the payment of dividends.
The rules are stricter in the case of a public limited company /PLC than a private limited company/ LTD. A public limited company must have a minimum subscribed and paid up share capital. PLCs are subject to stricter rules on a number of other matters, which seek to protect capital.
Breach of the capital protection rules makes the company and officers in default, guilty of an offence. It is subject on summary conviction to up to 12 months’ imprisonment and a fine or both or on conviction on indictment to a fine and up to five years’ imprisonment or both.
Various Protection Rules I
A company may resolve by special resolution that part of its uncalled capital is not to be capable of being called up, except for the purpose of winding up. This amount is called reserve capital. The members may each have to contribute in the event of winding up, in proportion to their shareholding. Their individual consent to any increase in their liability as shareholders is required. Reserve capital is very rarely found in practice.
Unrealised income and gains are not distributable. This includes increases in the value of assets. If the assets are revalued upwards, the increase is posted to an undistributable reserve. In effect, it is treated as capital so that it is distributable only on a winding up.
In contrast, a company may be obliged to recognise a fall in the value of its assets under accounting practice. A provision may be required to be made, which reduces distributable profits. See the section on distributions.
Various Protection Rules II
When shares are issued at a premium, (i.e. for more than their nominal value), the excess over the nominal value must be placed in a share premium account. This is treated in much the same way as capital and cannot be distributed.
Where the net assets of the company are half or less of the amount of the company’s called up share capital, the company must convene an extraordinary general meeting to consider what measures should be taken. This must be done within 28 days of the matter coming to the company’s attention. There is no obligation to do anything in particular, at the convened meeting.Its purpose is to give the shareholders the opportunity to take action to mitigate a worsening financial position.
Directors who knowingly or willingly fail to summons the meeting are guilty of an offence. They are liable on conviction on indictment, to a fine or imprisonment up to five years or on summary conviction, they are liable to imprisonment up to six months or a fine.
The general principle is that a company cannot distribute its capital or purchase its own shares. It cannot generally redeem or cancel its own shares. Prior to 1990, the only exception lay in the power to issue redeemable preference shares.
The general principle is that a company may not be a member of itself or a member of a company which is its holding company. The general principle, subject to the wide exceptions that now exist is that any allotment or transfer of shares in the company to its subsidiary is void. This does not apply to a subsidiary which is a trustee, or personal representative.
The general position was modified in 1990, subject to compliance with conditions.Since 1990 a company may redeem and repurchase its shares, subject to conditions. It must do so from distributable profits. The topic is dealt with in a separate section. In broad terms, the provisions apply also to the acquisition of shares in the company’s holding company.
The conditions on the redemption and purchase by a company of its own shares are detailed. They represent a very significant exception to the general rule. However, the strict conditions applicable are not satisfied, the general prohibition is breached.
There are a number of exemptions from the general capital protection rules which predate the general relaxation of the law in 1990. They include
- where the company acts as a trustee;
- redeemable preference shares;
- purchase pursuant to court orders, for example in a claim for oppression; and
- forfeitures for non-payment of calls etc.
Where the shares of a company are issued to a nominee for it and are fully paid up, they are treated as held by the nominee for his own account. The company is regarded as having no beneficial interest in them. If they are issued to a nominee and sums remain payable on the shares, the directors of the company or in the case of initial shares, the subscribers, are jointly and severally liable to pay the sum to the company. The court may relieve directors and subscribers if they have acted honestly and reasonably.
The modern permissible exceptions, as re-stated in the 2014 Act are
- by transfer or surrender to the company, otherwise than for valuable consideration;
- by cancellation pursuant to a reduction of company capital by either of the means permitted under the Act;
- pursuant to an order of the court under the Act;
- where those shares are redeemable shares, by redemption or purchase under the Act;
- by purchase in accordance with the Act;
- where those shares are preference shares, by redemption under the Act;
- pursuant to a merger or division under the Act;
- under powers of a company for forfeiture for non-payment of calls;
Subsidiaries of PLCs
Limited companies which are subsidiaries of public companies are prohibited from acquiring shares in that public holding company, subject to exceptions. The subscription for or the acquisition of shares in its parent public company by a private limited company is permissible, where
- the private company is a personal representative or trustee; any such trust must not be for the benefit of the public limited company or a subsidiary;
- where the allotment is in consequence of a capitalisation by the holding company and the terms of the capitalisation is such that the subsidiary is not thereby obliged to make any payment or give consideration for the shares;
- the subscription, acquisition or holding of the shares in its parent company is effected on behalf of a person, other than the person subscribing or acquiring the shares, who is neither the parent company nor its subsidiary;
- it is the subscription or acquisition or holding of shares by an authorised market maker.
Where shares in a public limited company are allotted to a private limited subsidiary, then unless previously disposed of them, the provisions regarding treatment by the plc of its own shares apply.
There were a number of older exceptions to the general prohibition on a company holding shares in its own holding company, which continue to apply. In particular, the prohibition
- does not prevent subsidiaries which were members of their holding companies prior to 1959 from continuing to be members;
- does not prevent a company which at the date on which it became a subsidiary, is a member of that other company, from continuing to be a member;
- does not prevent the subscription, acquisition or holding of shares in a parent public company which is a member of an authorised market operator acting in its capacity as a professional dealer in securities in the normal course of its business;
- does not prevent a subsidiary which is a member of its holding company from accepting or holding further shares by reason of a capitalisation, where the capitalisation does not require any payment or consideration for such shares.
Save where it is a trustee or personal representative, a subsidiary which is a member of its holding company has no right to vote at meetings of the holding company or of any class of members. The exception does not apply where the principal or beneficiary for whom the nominee or trustee holds, is a company or another party who would be prohibited from holding the shares.
Where a holding company makes an offer of shares to its members, it may sell on behalf of a subsidiary, any shares which the subsidiary could, but for the provision, have taken by virtue of shares which it already holds in the holding company. It may pay the proceeds of the sale to the subsidiary.
References and Sources
Companies Act 2014 Various Sections (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.10 Courtney
Keane on Company Law 5th Ed. (2016) Ch.15 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law