Impaired capital definition
/What is Impaired Capital?
A company has impaired capital when the aggregate amount of its capital is less than the par value of its shares outstanding. This situation arises when a firm has lost capital, either by issuing an excessive amount of dividends, by incurring losses (known as a retained deficit), or a combination of the two. If the company later earns a profit or gains equity from a stock offering, it can reverse the situation.
Depending on the laws of the state in which a business incorporates, it may not be possible to pay dividends that would create a retained earnings deficit. If so, the only cause of an impaired capital situation is the incurrence of losses.
Impact of Impaired Capital
The existence of impaired capital is a strong indicator that a business is experiencing financial distress. This can trigger clauses in the firm’s lending documents that allow lenders to call their loans at once, which may result in the organization’s bankruptcy.