5.4 Maintenance of capital

5.4 MAINTENANCE OF CAPITAL

Maintenance of capital refers to the legal principle that governs the protection of a company’s share capital and restricts certain actions that could result in the reduction or depletion of that capital. The aim of this principle is to safeguard the interests of the company’s creditors and shareholders.

Capital preservation The principle of capital preservation requires a company to safeguard its share capital and prevent it from being distributed or diminished in a way that could prejudice the interests of creditors.

Prohibited reduction of capital Companies are generally prohibited from reducing their share capital unless certain legal procedures and requirements are followed. Reduction of capital may involve canceling shares, reducing their nominal value, or returning capital to shareholders.

Distribution restrictions Companies must comply with restrictions on the distribution of capital to shareholders, including dividends and other forms of distributions. Dividends or distributions can only be made out of profits or distributable reserves, ensuring that the company remains financially sound and able to meet its obligations.

Solvency and financial tests: Some jurisdictions require companies to meet solvency or financial tests before making distributions or reducing capital. Solvency tests typically assess the company’s ability to pay its debts as they become due and determine whether the distribution or reduction would negatively impact its financial viability.

Regulatory compliance Companies are required to comply with relevant laws, regulations, and accounting standards related to the maintenance of capital.

Consequences of non-compliance: Failure to comply with capital maintenance requirements can result in legal consequences, including liabilities for directors, challenges to distributions or reductions, and potential invalidation of transactions.