It is a fundamental rule of company law that that the Companies Acts by implication prohibit a company from returning capital to shareholders except in one of the ways expressly permitted by the Acts. A purchase of shares by a company which is not authorised by the Companies Acts is unlawful and ultra vires
Lord Watson explained that the law prohibits: ‘every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless the Court has sanctioned the transaction. Paid-up capital may be diminished or lost in the course of the company’s trading; that is a result which no legislation can prevent; but persons who deal with, and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.’
Lord Macnaghten said that ‘. . if shareholders think it worth while to spend money for the purpose of getting rid of a troublesome partner who is willing to sell, they may put their hands in their own pockets and buy him out, though they cannot draw on a fund in which others as well as themselves are interested’.
Lord Watson, Lord Macnaghten
(1887) 12 App Cas 409
England and Wales
Cited by:
Cited – It’s A Wrap (UK) Ltd v Gula and Another CA 11-May-2006
The company was said to have paid dividends unlawfully, in that the directors who were the shareholders had paid themselves dividends knowing that the company had not earned enough to pay them.
Held: Where shareholders had knowledge of the . .
Lists of cited by and citing cases may be incomplete.
Updated: 28 July 2021; Ref: scu.242627
