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Capital Maintenance Rules, Equity Financing Notes

BCL Law Notes > Irish Company Law: Financing, Insolvency and Rescue Notes

This is an extract of our Capital Maintenance Rules, Equity Financing document, which we sell as part of our Irish Company Law: Financing, Insolvency and Rescue Notes collection written by the top tier of University College Cork students.

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CAPITAL MAINTENANCE RULES: EQUITY FINANCING.
 Guillifer & Payne Suggest the reasons we have rules around the distribution of dividends is to protect the interests of the creditors. you need to balance their interests with that of the shareholders. In addition, equity capital needs to be accounted for and maintained,
hence the need for the Capital Maintenance Rules.
 Irene Lynch Fannon finds that Capital Maintenance Rules are theoretical rules which are almost far from reality. Exemptions from the rule are found in s.82(6) & s.82(5)(a)&(b)
and the most significant exemption is set out in s.203 under the Summary Approval
Procedure: which has three requirements; 1. Declaration, 2. Special Resolution & 3.
Declaration delivered to CRO, the main purpose of this proviso

1) DIVIDENDS & DISTRIBUTION OF PROFITS.
 Shareholders have no legal right to a dividend they play a completely reactive role and cannot demand a dividend.
 The declaration of a dividend is entirely at the discretion of the directors and they will decide when to declare dividends and pay the shareholders with a dividend or they can withhold this dividend and invest in the company.
 The shareholders can reject or accept the declaration of a dividend which is valued at the nominal value at the AGM. However, once the dividend is declared there is a contractual duty to pay the dividend which was accepted, Wilson (Inspector of Taxes) v. Dunnes
Stores (Cork) Ltd. 1976 Unreported HC.
 The majority of the time a steady profitable company will declare a dividend of some kind along with market value of shares to keep shareholders happy.

 US: Dodge v. Ford Motors: This was where a company had been consistently profitable and where the board persistently refuse to declare and pay dividends, it was established that the shareholders may use oppression to bring an action against the board of the company.

 CF. Burland v. Earle: where it was decided that a declaration of dividends is a matter entirely of director discretion.

 Courtney, notes that "the above is settled law. The outstanding issue is the calculation of the profits from which dividends can be paid".

 Re Irish Life and Permanent plc [2009]: Clarke J. in Irish law describes what calculation of profits dividends come from, and he merely states that distributable profits are those which are calculated in accordance with the existing accounting standards. CAPITAL MAINTENANCE RULES: EQUITY FINANCING.
 EU DIRECTIVE 2012/30/EU: Is a Directive which has aligned all the Member States in dealing with the running of companies. There are capital maintenance provisions which create the accounting standards for the distribution of dividends arises. For example, you would have to have account of all the liabilities and accumulated losses, as well as issued share capital being accounted as a liability. As a whole, it is clear that the creditors funds needs to be accounted for before the distribution of dividends to shareholders occurs.
 This capital maintenance rule has been criticized and the argument is that when the decision to issue dividends is given it is based on old financial accounts and it doesn't give an accurate reading of whether the company is stable at the present.
 The test needs to be forward looking to look to the future which would provide more accuracy as to whether the company can afford to pay dividends in the future and whether or not they should be issued in the particular present time.
 This approach is looked at in the Summary Approval Procedure, where a company is required to delve into the foreseeable future and make judgment as to whether or not they will be solvent or not.

2) REDUCTION OF CAPITAL.
 The capital maintenance rules around the reduction of capital concern when and how the company can reduce this capital, which is designed to protect the creditor.
 S.84 of the Companies Act which used to be s.72(1) of the Companies Act 1963; codified the common law and this provision is basically the idea that a company cannot spend its money by purchasing back shares from shareholders.
 Exceptions to this provision can be found in s.108 of the Act, where it allows for the buying back of preference shares.
 Treasury Shares Part 3 of the Act ss.109 and this is just a provision which covers issuing shares to raise money on a temporary basis, making use of the corporate wealth to pay them back. ( just an investment for a short period of time).
 It can be used as part of the court remedy of oppression to buy out minority shareholders
 Important to note that you can only redeem shares through the reduction of capital and the reasons for doing so are founded in s.84 of the Companies Act 2014.
 Two ways to do this: Summary Approval Procedure s. 202(1)(a)(i), this provision is supposed to streamline all the issues.
 Mason Hayes & Curran (2015); "[t]he whitewash procedure of a director's declaration of solvency and special resolution" is now the Summary Approval Procedure.

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