These provisions are based on a section in the Companies Act 1929 and are now very much out-of-date in comparison with current British law. The UK Companies Act 1981 (now consolidated in the Companies Act 1985) contains a complete prohibition on the provision of financial assistance by a public company for the purchase of its Own shares but provides for a private company to provide financial assistance under certain strict conditions. The principal condition is that the company has net assets which are not reduced by the giving of the assistance, or to the extent that those net assets are reduced, the financial assistance is given out of distributable profits. The new law also more clearly defines what constitutes "provision of financial
assistance".
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The Companies Act 1981 also introduced completely new provisions which allow the purchase by companies of their own shares under certain conditions. They allow both private and public companies to buy their own shares out of distributable profits the proceeds of a fresh issue
of shares made for the purpose, subject to prior approval by a special resolution in the case of a private company and by an ordinary resolution at general meeting in the case of a
own listed shares. public company buying its
In addition, private company can purchase its own shares out of capital if there are insufficient distributable profits and if there are insufficient proceeds from any fresh issue of shares.
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a
The Standing Committee first considered this subject in 1984. The concept of "distributable profits" was found to be central to the
to the British legislation and the Companies Act contains detailed statutory provisions on what constitute "distributable profits" There are no provisions on the subject of "distributable profits" in the Ordinance. The Standing Committee therefore decided that before any decisions could be taken on either the subject of section 48 or that of the purchase by a company of its own shares, a decision was required on whether the Ordinance should contain detailed provisions on "distributable profits".
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A Sub-Committee was set up in August 1985 to consider the subject. The Sub-Committee in its report issued in May 1986 identified certain basic rules governing the distribution of profits in the British legislation. Principal rules applicable to all companies include (a) that only the unapplied excess of realised profit
profit over realised losses may be treated as distributable; (b) that unrealised profit will not be distributable; and (c) past revenue losses
be made good before current realised profits distributable. Further, in the case of a listed public company, it
to the extent that it can only make a distribution to its net assets after the distribution are not less than the
must
are
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