Capital maintenance - the Companies Act 2006

Distributions

The provisions relating to distributions in the CA 1985 have broadly been restated in Part 23 CA 2006 which came into force on 6 April 2008 and applies to distributions made on or after that date. It continues to be the case that a dividend or distribution to members cannot be made except out of profits available for the purpose by reference to “relevant accounts” and Part 23 sets out the rules relating to permissible distributions.

In addition, in relation to distributions in kind (arising for example, on the transfer of an asset intra-group from a subsidiary to its parent or a sister subsidiary at less than market value), the existing City market practice that arose after the decision in Aveling Barford Ltd v Perion Ltd [1989] BCLC 626, has been confirmed in section 845 CA 2006 so that:

• if a company is transferring an asset where the amount or value of the consideration is not less than (i.e. is equal to or more than) its book value and the company has profits available for distribution, the transfer can proceed. The transfer will be treated as a distribution but the amount of the distribution is taken to be zero. For the purposes of section 845, the company’s distributable profits will be treated as being increased by the amount, if any, by which the actual consideration for the asset exceeds its book value; and
• if a company is transferring an asset for less than book value, the amount of the distribution is calculated by reference to the asset’s book value. The distribution will be deemed to be the difference between the book value of the asset and the amount or value of actual consideration given for it. Provided that the company’s distributable profits are equal to or exceed the amount of the difference, the distribution will be lawful.

Other points to note in relation to distributions:

• A further restriction applies to distributions by public companies which does not apply to distributions by private companies. A public company may only make a distribution if, following the distribution, the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves (section 831(1) CA 2006). The effect of this is that a public company must, when calculating the amount available for distribution, reduce the amount of its net realised profit available for distribution by the amount of its net unrealised losses (see section 2.31 of The Institute of Chartered Accountants in England and Wales’ Technical Release TECH 01/08).
• The statutory rules on distributions, with a couple of stated exceptions, are subject to the common law. Under the common law, a company cannot lawfully make a distribution out of capital. Accordingly, even if the “relevant accounts” show sufficient profits available for distribution, the directors must consider whether, subsequent to the relevant balance sheet date, the company has suffered losses which might affect the company’s ability to make a distribution.
• When deciding whether to make a distribution, the directors must consider their general duties, including their duty to promote the success of the company under section 172 CA 2006.