Capital Protection

Capital protection rules ensure that a company’s capital is preserved as a fund for creditors and is unavailable to shareholders except on winding up, after creditors are fully paid. These rules, originally developed under common law and reinforced by legislation, prohibit transactions that would improperly reduce capital, such as unauthorised distributions or share buybacks. While stricter for public limited companies (PLCs), private limited companies (LTDs) also face compliance obligations. Breaches may result in fines, imprisonment, or both for company officers.

Unrealised gains cannot be distributed and must be treated as reserves. Share premiums, the excess paid over nominal value for shares, are similarly treated as undistributable capital. If a company’s net assets fall below half of its called-up share capital, it must convene a meeting to address the situation. However, no specific corrective actions are mandated.

Companies cannot generally purchase or hold their own shares, though exceptions exist, such as redemptions, purchases from distributable profits, forfeitures for unpaid calls, or court-ordered transactions. Subsidiaries of PLCs face additional restrictions in acquiring shares of their parent companies, except in specific scenarios like capitalisations or authorised market making.

Modern laws have expanded the exceptions, allowing share buybacks and redemptions under stringent conditions, but failure to comply with these provisions constitutes a breach, potentially voiding transactions and incurring penalties.

Read a detailed Article on this subject with the Legislation and Cases, browse Irish Legal Guide  or Contact Us for advice below.