Question 1
1. The principle or rule known as the maintenance of share capital is based on the need to protect shareholders and creditors. Share capital is the contribution made by shareholders by subscribing shares of the company. A company’s creditors can only look to the share capital for the payment in the event of a winding up. To protect creditors, a general rule known as the rule in Trevor v Whitworth was developed to prohibit a company from reducing its share capital because a reduction in capital would prejudice the rights of creditors. Moreover, the reduction would in effect diminish the pool of funds available to the company to pay its creditors. The rule in Trevor v Whitworth has been incorporated into Ch 2J of the Corporations
Ordinary shares have the right to share pro rata in any surplus assets on a winding up too. On the other hand, a preference share is a 'hybrid' security, meaning it has features of both debt and equity. The term 'preference' indicates that it is rank ahead of the company's ordinary shareholders for the payment of dividends, and has a prior claim on the company's assets if the company is wound up. A preference share pays income in the form of dividends, and generally converts into ordinary shares at some future point. Section 254B of the Corporations Act 2001 stated the rights attaching to the shares. Preference share usually have the right to receive a fixed dividend (10 cents per share per year), provided there are profits available for distribution and a dividend is declared by the company. Moreover, preference share have the right to be repaid the principle on a winding up in priority to ordinary shareholders. However, preference share have no voting rights unless dividends are in arrears, except on resolutions to reduce the company’s capital or wind up the company, or at class meetings on matters. Lastly preference share have no right to share in surplus assets on winding up. One of the advantages of equity finance over debt finance is tax deductibility. The distributions paid on the debt finance (that is, interest payments) are generally tax deductible for the company,