The effectiveness of legal restrictions on distributions to shareholders in achieving "Creditor Protection"

Résumé du document

In this essay, I will critically evaluate the effectiveness of legal restrictions on distributions to shareholders in achieving "creditor protection". It consists of showing the good and the bad points of these restrictions. Firstly, I will define the terms used previously. Then, I will present the legal restrictions and finally, I will criticize the effectiveness of these legal restrictions. A shareholder retains a title representing a part of the capital of a company. A shareholder can be an individual or a company. He can have one or several shares. Additionally, he is one of the financial partners of the company and favors its economic development by the provision of its capitals. His catch of financial risk is remunerated by dividends poured by the firm to each of the owners of actions. "Shareholders are external users.

Extraits

[...] Thanks to these approaches creditors are protected. The Companies Act 2006 advices the indirect approach but we have certain creditors who choose the other approach to have a mortgage debenture greater than the firm's assets. Consequently, the trade creditors are penalized with creditors' claims; they could be protected against the two risks quoted before. Creditors are also protected by two aspects of share capital: minimum capital requirements and capital's reduction. In the case of public companies, “creditors may be protected by the requirements that there should be a minimum share capital and that capital should be reduced only under controlled conditions” ELLIOT and J ELLIOT p. [...]

[...] In the next part, the different legal restrictions putting into place to protect creditors will be described. To protect creditors, we have the capital maintenance concept. a general rule, the paid-in share capital is not repayable to the shareholders and the reserves are classified into two categories: distributable and non-distributable. The directors have discretion as to the amount of the distributable profits that they recommend for distribution as a dividend to shareholders. However, they have no discretion as to the treatment of the non-distributable funds. [...]

[...] The dividend distribution depends of the profit of the firm. The more shares a shareholder has in the company, the more he will receive as dividend. definition of distributable profits under the Companies Act 2006 is: Accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, as far as nor previously written off in a reduction or reorganisation of capital”. ELLIOT and J ELLIOT p et seq.). To protect creditors, there are habitually policies relating to the employ of the shareholders' money that establish how much to distribute. [...]

[...] There is no law as the presented one so that companies can distribute dividends to the shareholders out of capital which it's not good for creditors. For example, if a company distribute all to the shareholders, there will be nothing for the creditors. Consequently, the distributable profit is positive for the creditors if they want to receive money from the company. As a conclusion, we can see that there are different rules to protect creditors during the distributions to shareholders. [...]

[...] Consequently, the minimum share capital is not very efficient in achieving creditor protection. In the case of private companies, there is not a minimum share capital and it can be found some companies that have a share capital of Thus, it is not credibly to protect the creditors because of too small paid-up capital. Furthermore, a reduction of capital can protect creditors. In fact, it will permit to cancel losses of the company, repay the shares to shareholders and purchase own shares. [...]