A subcategory of equity capital that cannot be distributed to equity holders (shareholders) unless an entity considering doing so complies with a set of restrictions including statutory procedures (e.g., creditor protection set in company law). In other words, an entity cannot distribute restricted equity to its shareholders unless it accounts for the rights of its creditors (as to claim in its assets).
In case of bankruptcy (of a limited company), the shareholders have lower priority on the scale of distribution (of its assets) as compared with the debt investors (company creditors) who have a stronger position. In reality, shareholders often lose their entire equity in the event their entity goes bankrupt. Share capital can be returned to the shareholders only after having put in place specific procedures aiming to protect creditors and to secure their outstanding debt.
Restricted equity includes share capital as well as the fair value reserve and revaluation reserve. Other reserves, invested unrestricted equity, as well as the profits of the current financial period and retained earnings relating to previous financial periods are all part of unrestricted equity.
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