ACCA LW · Chapter 9
Share capital, loan capital and capital maintenance MCQs with Answers
11 multiple-choice questions on Share capital, loan capital and capital maintenance for ACCA LW Corporate and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Unless the articles provide otherwise, how are the dividend rights of preference shares presumed to operate?
- A) The dividend is presumed to be non-cumulative and lost if not paid
- B) The fixed preference dividend is presumed to be cumulative, so unpaid arrears carry forward
- C) Preference shareholders are presumed entitled to share in surplus profits equally with ordinary shareholders
- D) The dividend must be paid even when there are no distributable profits
Show answer & explanation
Answer: B) The fixed preference dividend is presumed to be cumulative, so unpaid arrears carry forward
Preference shares carry a right to a fixed dividend in priority to ordinary shareholders, and this right is presumed to be cumulative unless stated otherwise. They are presumed not to participate further in surplus profits. No dividend can be paid on any shares unless the company has profits available for distribution.
Question 2
Under s630 Companies Act 2006, how may the rights attached to a class of shares be varied where the articles contain no provision for variation?
- A) With the written consent of holders of at least three-quarters in nominal value of the class, or a special resolution at a separate class meeting
- B) By an ordinary resolution of all members of the company
- C) By a resolution of the board of directors
- D) Only with the unanimous consent of all members of the company
Show answer & explanation
Answer: A) With the written consent of holders of at least three-quarters in nominal value of the class, or a special resolution at a separate class meeting
Where the articles are silent, s630 allows class rights to be varied with the consent in writing of holders of at least 75% in nominal value of the issued shares of the class, or by a special resolution passed at a separate meeting of that class. Holders of at least 15% of the class who did not consent may apply to court to have the variation cancelled under s633. A board resolution or an ordinary resolution of all members is not sufficient.
Question 3
A company issued new ordinary shares, which reduced the proportionate voting power of the existing preference shareholders. The preference shareholders argued their class rights had been varied. Following White v Bristol Aeroplane Co, what is the position?
- A) The class rights have been varied, so class consent was needed
- B) The issue is void because preference shareholders have a veto over all share issues
- C) The class rights have been varied only if the new shares were issued at a premium
- D) The class rights have not been varied, because the rights themselves remain unchanged even though their practical value is affected
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Answer: D) The class rights have not been varied, because the rights themselves remain unchanged even though their practical value is affected
The courts distinguish between the legal rights attached to shares and their enjoyment or value. In White v Bristol Aeroplane the issue of further shares affected the preference shareholders' relative voting strength but left their rights exactly as they were, so there was no variation requiring class consent. This literal approach gives limited protection to class members.
Question 4
Under s561 Companies Act 2006, when a company proposes to allot new ordinary shares for cash, what right do existing ordinary shareholders normally have?
- A) A right to receive the new shares free of charge
- B) A right to block any allotment of shares by voting against it
- C) A right to buy the new shares at a discount to nominal value
- D) A right of pre-emption, meaning the shares must first be offered to them in proportion to their existing holdings
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Answer: D) A right of pre-emption, meaning the shares must first be offered to them in proportion to their existing holdings
Pre-emption rights require new equity securities allotted for cash to be offered first to existing ordinary shareholders pro rata, protecting them against dilution. The rights do not apply to allotments for non-cash consideration and may be disapplied, for example by special resolution. Shares can never be allotted at a discount to nominal value (s580).
Question 5
A company issues 10,000 shares of nominal value 1 each for 2.50 per share, paid in cash. What amount must be credited to the share premium account?
- A) 25,000
- B) 10,000
- C) 2,500
- D) 15,000
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Answer: D) 15,000
The share premium is the excess of the issue price over nominal value. Working: premium per share = 2.50 - 1.00 = 1.50; total premium = 10,000 x 1.50 = 15,000. The 10,000 nominal value is credited to share capital, and the full 25,000 is the total cash received. Under s610 Companies Act 2006 the premium must be transferred to a share premium account.
Question 6
A public company has the following balances. Accumulated realised profits 640,000; accumulated realised losses 190,000; accumulated unrealised profits 70,000; accumulated unrealised losses 110,000. Applying ss830 and 831 Companies Act 2006, what is the maximum amount it may distribute?
- A) 410,000
- B) 450,000
- C) 520,000
- D) 340,000
Show answer & explanation
Answer: A) 410,000
Step 1 (s830, all companies): net realised profits = 640,000 - 190,000 = 450,000. Step 2 (s831, public companies): the distribution must not reduce net assets below called-up share capital plus undistributable reserves, so any excess of unrealised losses over unrealised profits must also be covered. Net unrealised loss = 110,000 - 70,000 = 40,000. Maximum distribution = 450,000 - 40,000 = 410,000. A private company could distribute 450,000, as unrealised profits can never be distributed and net unrealised losses do not affect it.
Question 7
Which of the following is a requirement for a private company to reduce its share capital without applying to the court?
- A) A special resolution supported by a solvency statement made by all the directors
- B) An ordinary resolution supported by a statement from the auditors
- C) A board resolution supported by a statement of the company's net assets
- D) A special resolution approved by the Registrar of Companies before it is passed
Show answer & explanation
Answer: A) A special resolution supported by a solvency statement made by all the directors
Under s641 Companies Act 2006 a private company may reduce its capital by special resolution supported by a solvency statement in which every director confirms the company can pay its debts. Alternatively, any company may reduce capital by special resolution confirmed by the court, which is the only route for a public company. The Registrar registers the documents but does not approve the resolution in advance.
Question 8
Under the Companies Act 2006, which of the following is prohibited?
- A) A private company giving financial assistance for the purchase of its own shares
- B) A company issuing shares at a premium
- C) A public company giving financial assistance for the purchase of its own shares, subject to specified exceptions
- D) A company paying a dividend out of accumulated realised profits
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Answer: C) A public company giving financial assistance for the purchase of its own shares, subject to specified exceptions
Section 678 prohibits a public company (and its subsidiaries) from giving financial assistance for the acquisition of its own shares, subject to exceptions such as where the principal purpose is not the acquisition. The general prohibition for private companies was abolished by the 2006 Act. Issuing shares at a premium and paying dividends from realised profits are lawful.
Question 9
Which of the following best describes a floating charge?
- A) A charge over a specific identified asset that the company cannot sell without the lender's consent
- B) A charge that is valid without registration
- C) A charge over a class of assets, present and future, which the company can deal with in the ordinary course of business until crystallisation
- D) A charge that always ranks ahead of a fixed charge over the same asset
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Answer: C) A charge over a class of assets, present and future, which the company can deal with in the ordinary course of business until crystallisation
A floating charge, as described in Re Yorkshire Woolcombers Association, covers a class of present and future assets which change in the ordinary course of business, and the company may deal with them until the charge crystallises. A fixed charge attaches to specific assets that the company cannot freely deal with. Fixed charges normally rank ahead of floating charges, and both require registration.
Question 10
Which of the following events would normally cause a floating charge to crystallise?
- A) The company buying new stock in the ordinary course of business
- B) The company paying a dividend to its members
- C) The appointment of a new director
- D) The commencement of winding up of the company
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Answer: D) The commencement of winding up of the company
A floating charge crystallises, becoming fixed on the assets then held, on events such as liquidation, the company ceasing to carry on business, the appointment of a receiver, or a specified event under the charge document. Ordinary trading such as buying stock is exactly what a floating charge permits. Payment of a dividend or a change of directors does not cause crystallisation unless the charge document says so.
Question 11
A company creates a charge over its assets in favour of a bank but fails to deliver the particulars to the Registrar within 21 days. What is the effect under s859H Companies Act 2006?
- A) The charge is void against a liquidator, administrator and creditors of the company, but the debt itself remains payable and becomes immediately repayable
- B) Both the charge and the underlying loan become void and need not be repaid
- C) The charge remains fully valid but the company is fined
- D) The charge becomes a floating charge instead of a fixed charge
Show answer & explanation
Answer: A) The charge is void against a liquidator, administrator and creditors of the company, but the debt itself remains payable and becomes immediately repayable
Failure to register a charge within 21 days of creation makes the security void against a liquidator, administrator or creditor, so the lender becomes an unsecured creditor in an insolvency. The obligation to repay is not affected, and the money secured becomes immediately payable. The court may extend the period for registration in some circumstances.