Q&As

Can a capital contribution/gift by a shareholder be treated as distributable reserves?

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Produced in partnership with Brenda Hannigan of Southampton University
Published on LexisPSL on 19/05/2016

The following Corporate Q&A produced in partnership with Brenda Hannigan of Southampton University provides comprehensive and up to date legal information covering:

  • Can a capital contribution/gift by a shareholder be treated as distributable reserves?
  • Case law
  • Commentary

Can a capital contribution/gift by a shareholder be treated as distributable reserves?

The issue is whether capital contributions or gifts by a shareholder can be treated as distributable reserves in the light of Kellar v Williams.

Distributions are governed by the Companies Act 2006, Part 23 (CA 2006) (see Practice Notes: Dividends—the legal framework and Distributions) and also by ICAEW: Tech Release 02/10 (Tech 02/10) since the essence of the legal requirements is that there be distributable profits, as determined by the company’s relevant accounts. The purpose of Tech 02/10 is to provide guidance on realised and distributable profits for this purpose.

Tech 02/10 at para 3.9 explains that a realised profit may arise from a transaction where the consideration received by the company is a ‘qualifying consideration,’ defined in para 3.11, including cash or an asset that is readily convertible to cash. The guidance further identifies at para 3.14 as an example of a realised profit: ‘a gift (such as a capital contribution) received in the form of

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