Principle of capital maintenance

In this lesson

1. 0:00 Capital maintenance and dividends overview
2. 1:01 Capital maintenance principle explained
3. 2:28 Permitted reasons for capital reduction
4. 4:07 Procedure for public companies
5. 5:20 Procedure for private companies

About this lesson

Capital maintenance exists to protect creditors by ensuring companies maintain a financial buffer—preventing owners from extracting funds and leaving creditors unable to recover what they're owed. You'll explore when capital reduction is permitted, the strict procedures required for public and private companies, and the serious consequences of breaching these rules, including potential fraud charges. The lesson covers the legal framework governing capital maintenance under company law, including the circumstances where capital can be reduced (such as cancelling unpaid share amounts or writing off losses) and the protective measures in place. For public companies, you'll learn that a special resolution requiring 75% shareholder approval and court approval is mandatory, with creditors given the opportunity to object. For private companies, the process is less formal but still requires a special resolution and a directors' statement of solvency confirming the company can pay its debts over the next 12 months. This content is essential for understanding the restrictions on dividend distributions and capital movements—topics directly relevant to your Financial Reporting and Corporate and Business Law studies. Understanding capital maintenance principles helps you advise clients correctly on what can and cannot be paid out as dividends, and the legal safeguards protecting both creditors and the integrity of company finances.

Duration: 7m