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Corporate law - Case Study Example

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Corporate law

The exception to this is that the reserve may be applied by the company in paying up its unissued shares which are to be allotted to company members as fully paid bonus shares.
Further, if the permissible capital payment exceeds the nominal amount of the shares redeemed or purchased, the amount of any capital redemption reserve, share premium account or fully paid share capital of the company, and any amount representing unrealised profits of the company for the time being standing to the credit of any revaluation reserve, may be reduced by a sum not exceeding, or by sums not in the aggregate exceeding, the amount by which the permissible capital payment exceeds the nominal value of the shares.4
Where, however, the proceeds of a fresh issue are applied by a company in making any redemption or purchase of its own shares in addition to a payment from its capital under these provisions, the references to the permissible capital payment are to be read as referring to the total amount of that payment and those proceeds.
The CRR is mainly used to ens...
The CRR is mainly used to ensure that the company's capital is not reduced by the redemption of its shares. If the company was to redeem its shares, and the CRR was not used, then there would be a reduction in the company's capital in line with the reduction of the amount of shares redeemed. Although the CRR cannot be distributed out to shareholders by way of dividend in the same way that profits would be utilised, they would be available for issuing bonus issues of share capital should such a scenario arise.
Accordingly, the CRR plays an important role in maintaining the value of the company, by both keeping shareholders of redeemable preference shares happy in allowing them to redeem their shares, while also keeping the other shareholders content as the value of the share capital in the company is maintained. This means that there shareholding will be in no way diminished as a result of the redemption.


Revaluation Reserves
Revaluation reserves arise when the value of an asset becomes greater than the value at which it was previously carried on the balance sheet, increasing shareholders funds.5 Not every increase in value is added to the revaluation reserve, and the exact treatment depends on the history of the asset. Revaluations are carried out when there is a material difference between the current market value of an asset and the value at which it is carried on the balance sheet.
Revaluation reserves are not distributable, but may be used for scrip issues, where there is an issue of new shares to existing shareholders at no charge, pro rata to their existing shareholdings. A scrip issue is essentially when one shareholder moves their money from one account to another account belonging to the ...Show more

Summary

Where company shares are redeemed or purchased wholly out of a company's profits, the amount by which the company's issued share capital is reduced on cancellation of the shares which are redeemed or purchased or on cancellation of shares held as treasury shares must be transferred to the capital redemption reserve (CRR).2 If the shares are redeemed or purchased from the proceeds of a fresh issue and the total amount of those proceeds is less than the total nominal value of the shares redeemed or purchased, the difference in amount must be transferred to the CRR…
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