Share Capital

Companies are limited liabilty- meaning only limited to pay what it has. Creditor needs to know how much it has.

2 forms of capital- 

• Share/equity capital- money paid for the shares. Investment capital. Members. 
• Loan capital- borrowed money from the bank, or can issue debentures- I owe you's. Pay regular interest and can be bought or sold. Creditors. Not relevant to protection of creditors. 

Initially law devised rule- share capital and anything that becomes the same must be protected and cannot be returned to the members. Has no power to reduce capital. Maintenance of capital rule. Only valid if have it. 

Raise capital rules- classic doctrine of company law. 

How does a creditor know? Disclosure of accounts. All companies need to register accounts with a registrar. Need to disclose balance sheets and profit and loss over the year. Need to be audited. Should be able to look at the accounts. 

Balance sheet- assets should balance the capital. All shares have nominal value. Issuing shares at par= nominal value. Issuing shares for more than the nominal value= at a premium. 

Say you make £1000 profit on trading for the year. This isnt capital. It can be turned into capital by investing it in the company. 

If you dont turn it into capital then it goes into the revenue reserve- meaning £1000 on hold. Non capital fund to balance. 

Can distribute to shareholders. Doesnt go on the balance sheet at all. It's gone. Law doesnt allow you to distribute your capital. 

Rules for increasing capital- Can do as increasing assets is a benefit. 

Say if shares were worth £1 each, may want to turn capital reserve into issued shares to dilute the prices. 

Give shareholders script dividends= bonus shares. Can turn profit into capital or turn reserve into shares. 

Issue 500 new bonus £1 shares. Must distribute pro rata/ equally. Halved the value of the shares. 

Bonus share doesnt give you anything. Two are worth the same as one. Not taxed on. Increased the number of shares in a business. 

Reduction of capital- 

Cannot reduce share capital. This is for creditors, not members. Bit inflexible, the money might not be there. Might not need all the money, might be over capitalised. 

Statute intervened so now there is a set procedure for reducing capital. Now in s645 CA. Can reduce if there is the power in the articles, and authorised by a special resolution (75% vote for it) and confirmation by court.

Creditors can object in court as their money is protected. s646 - creditors can only object if they can show real likelihood that the company will be unable to pay its debts. Must have viable debt. 

Re Liberty International 2010- argument was that creditor said it might be problem with companies pension and pensions regulator, as might order a contribution and the creditor wouldnt be paid if that happened. Judge said no. There was no viable debt at this stage, only possible. Even if there was, there wasnt any real likelihood they wouldnt be paid. 

3 elements to a creditor objection- 

• factual- judge on facts as known, not speculation
• temporal- further away the possibility, the less likelihood it has of succeeding
• burden of proof on creditor, not company. Not probably but more than possibility. 

Sportech 2012 and Re Vodafone 2014- take Liberty line. 

They have added a bit- should look at cash flow as well. 

Expensive and difficult for creditor to oppose reduction. Creditor cant object if the money is already gone.

Moorgate Mercentile 1980- company has to prove loss. 

You can have more than one class of shareholder- does the reduction pick on one particular class?

Re Holders Investment Trust 1971- class of 5% redeemable preference shares. Would be repaid in 1971. In the mean time, they get 5% back. Company wanted to get rid of them early as they were coming up for redemption. Cancelled those and gave 6% debentures, but not redeemable until 1985. Shareholders didnt like this. Megarry said this wasnt fair between classes of shareholders. They were being picked on and it was too far. 

Alternative procedure in 2006 act for private companies- s641-44-holds a simplified form. Solvency statement and special resolution. Dont need to go to court. 

Solvency statement- made in the 15 days before meeting, must be available for the members. s642. Made by all the directors- s643. Any one who wont sign must resign or it is invalid. Say two things- 1) balance sheet solvency. As things stand the company can pay all debts. 2) cash flow solvency- should be able to pay debt and do so in the next 12 months. 

Recap- might have lost the money. Might have too much capital. Might want to manage debt to equity ration. 

Sequana SA 2016- As a creditor need to challenge solvency statement. s634- criminal sanction- need to act reasonably. Rose saw the case- First instance- not the same as a statutory procedure. Not as rigourous a test. Directors must show formal opinion and considerations. Must have applied solvency test. Must be honest. Challenge in case on balance sheet. Directors not bound to consider worst case scenario. Not about winding up. Non technical test. On date of the statement, must take into account contingent and respsective liablilities and is the company able to pay its debts? Question of judgement. This is a contentious decision- no requirement to show judgement is reasonable, just and honest. 

How will you know a company has reduced its capital? Requirement to register the effect. 

Maintaining capital- all about cash flow.

Raising capital? Shares have nominal value. Can issue shares at par- nominal value. Premium- more than the nominal value. Discount- less than the nominal value. 

Cant do at a discount. If shares are below nominal value, have to pay nominal value. 

Ooergum Gold Mining 1892- £1 shares could buy for 15p. Company needed more funds. Issued more £1 shares for 25p. Saved the compnay as fresh money. Company sued shareholders for extra 75p. HoL said allowed as company cannot issue shares below nominal value- s580. Liable to pay the difference and interest. Liability passes to any subsequent holder of the share. Only person who can escape liability is bona fide purchaser without notice. 

Always major exception- courts will not inquire into validity of consideration. Issue shares for property- court wont inquire as to whether that is actually worth it. 

Re Wragg 1897- followed in Scotland where past consideration counted as well. 

Otherwise dealt with by s582- shares must be issued for money or moneys worth. 

One limit to this- in England cant issue shares for a promise to do something. 

Gardner v Iredale 1912- Company offers director cash to do something. Directors agreed to buy shares at the same time and agred to pay certain price for them. 2 separate contracts. Set off the debts, director does services and gets shares. Apparently valid. 

Purchase and redemption of shares (modern)- company cannot issue redeemable shares as a reduction of capital. Cant buy back your own shares. Trevor v Whitworth 1887. 

Still basic rule but now procedures for both so can do these. Reasons- small companies need investors and dont want to be locked in forever. Redeemable shares allow for this. Purchase own shares- debt/equity ratio, might want to borrow instead. Employee share schemes. Have to transfer shares to trustees for employees. Need to buy them back to give to trustees.

1981 companies first given these powers- s660. Have gradually been relaxed- changes in 2009 and 2013. 

Redeemable shares- s684- companies have power to issue these. Maybe redeemable at either parties request. Private companies have automatic power to do so when articles say otherwise. Terms of redemption fixed by directors or articles. 

If a share is redeemed, it must be cancelled. It disappears. When you pay cash, can be on redemption or agreed later date. Companies dont really issue these anymore. They use share buy backs now so dont need redeemable shares. 

s690- all companies can buy back shares following set procedure. No authority needed in the articles. However cant postpone payment- need to pay there and then. Cant buy back all shares. Cant leave just redeemable shares. 

What do you do with them when bought? Can cancel them. But dont have to. Hold them in treasury and become treasury shares. Company bought back and hanging on to. 

How do you buy back shares? 

Off market- s693- specific contract has to be approved by company meeting. Since 2013, only requires ordinary resolution. Vendor cannot vote in the meeting. Same procedure applies to an option to buy. Bought from an individual. 

Market- s701- need prior approval from ordinary resolution but on power to buy certain number of shares within a price range. Can give power by reference to a formula. 

What happens if theres a mistake? There will be no power to buy back the shares. 

Western Ringblast Holdings 1989 Scotland- contract was unenforceable as the procedure was wrong. 

Re K W Peak 1998- followed this in England. Made mistake and applied for rectification to make valid. Court said no, cant rectify an unenforceable contract. 

What happens if you spot an error after the deal has gone through?

Kinlan v Crimmin 2007- mistake but had gone through. Said depends. If the vendor has spent money in good faith thinking geniune, then the court will not enforce against him.

Where does money to buy back shares come from?

s687 to 692- can only use distributable profits or issue new shares and use the proceeds. Profit is no reduction of capital at all. Share issues replace one set of capital with another.

BDG Roof Bond v Douglas 2000- didnt use cash, transferred assets to vendor. Is that ok? Court said allowed as long as you have enough distributable profits to cover it, so you can use cash assets.

If you dealt with a company how would you know it bought back shares? Balance sheet will show it. 

What if you dont have enough distributable profit? 

Private companies allowed to use capital for buy backs. s709 to 723- can use permissible capital payment. Need to get procedure right. Have to show you haven't got the profits. 

2013- new power- can use £15'000 of capital at any time without hoops. Private companies. Restriction- if 5% of share capital is lower than that, you have to use the lower figure. 

Need to use by reference to accounts that are no older than 3 months. In effect are reducing your capital. 

Declaration of solvency- balance sheet and cash flow. Requires auditors to confirm with a signature. Then have a week and must have a special resolution authorising. 

There is then a 5 week gap where you are not allowed to do anything. In that time, need to put an advert in national newspaper about what you'll do. Meant to alert creditors. 

Within two weeks must actually use it. If you dont buy the shares within two weeks, you lose the power. 

• Criminal penalities if no reasonable person could have made original statement. 
• In 5 week period, any creditor or dissenting shareholder can petition the court to set it aside. The court has wide powers. 

This was the third way of reducing capital. Wanted to remove from 2006 Act but outcry so was kept. 

• If an individual wanted to get money out of company unlawfully, company agrees to buy shares for lots of money and then company renegades on the death, so you're the one breaching contract. Damages are not unlawful returns. The intention all along.
• s735- no action for damages can lie in breach of contract to buy back shares. Can get specific performance to deliver shares but only if company can fund it from distributable profits. Taken literally. 

Barclays Bank v B and C Holdings 1995- scheme involving issuing buy back shares. Company covenanted to maintain assets value- stay solvent. Company didnt stay solvent. Bank suing for breach of agreement, as didnt buy back shares. Defence was that they were suing for damages on share buy back and s735 says you cant. Court said they had broken covenant to maintain share value and stay solvent. s7350 - actual failure to redeem suits only. Literal view adopted. 

Could company give compulsory purchase powers? What's to stop company putting this in their articles? When 1981 act went through, there was a clause on this that was taken out and no-one noticed. 

Brought back the shares- owner of the shares in yourself. Can cancel then, but only if really dont need the money. More likely to just sit on them. If you do that they become 'treasury shares'. Until 1981 this didnt exist. There are now allowed. Easing restrictions. 

Only one restriction- s724- had to have bought them out of profits. If bought them from capital you have to get rid of them. 

s727- treasury shares can be used to cancel, can continue to hold or can attribute them to an employee share scheme. 

Must have brought out of profits. What do you do with the money if reselling them? Can resell for any price. If sell for same amount or lower, can use as profit. If sell for higher price than paid, must transfer to capital. 

How can you be a member of yourself? 

Theoretical problem only- purely nominal. All votes on the shares are frozen. No dividends payable on them and any other articles rights to be ignored. 

Distributions- of profit on shares. Get a dividend on your share. Only payable from income, not capital. 

2 complications- courts messed it up a bit. Can get money out of compnay without dividends. Unlawful distributions. 

1) only out of profits- 3 areas they got it wrong- suppose you have asset depreciating in value eg a quarry. Does that matter? Can you distribute profits without balancing depreciation? Dont have to. Lee v Neuchatel Asphatle 1889- dont have to set aside profits for depreciation, can just ignore it. 

What if it increases in value eg land? Balance sheet= x is now 2x. Can you distribute gains? If sell the land (realise the gain) then can distribute extra. Lubbock v British Bank of SA 1892. 

What if you make a series of losses? 1,2,3 but in year 4 make a profit. Can you just distribute profit from 4 and ignore the other 3? Can dish out, forget the losses. Must have depreciated assets. 

Works poorly in those 3 areas. Not used much as wont get signed off. 

Statute has taken over common law- s829 to 853, 830 and 831. s830- basic test for all companies. Don't distinguish between income and capital. Distributable profits are companies available realised profits minus its realised losses and this amount can be distributed. Can't ignore unrealised losses, fact made loss last year must come off this year. 

s831- additional test for public companies. If net assets are less than issued share capital, cant distribute. 

Only applies to paying dividends. Don't overrule non dividend distributions. Cannot return capital to members unless in an approved route. s829 preserves it and s851 extends it.

If company has no power- ultra vires. 

How can you spot this? Re Halt Garage 1982- paid a large sum to a director out of capital 'for his fees'. Not returning income to members. This director had never done anything for the company, had been disguised. This was ultra vires and therefore void. 

Aveling Barford 1989 - eaiest way to get money out of company is to sell asset for price far less than its worth. Selling at an undervalue is an unlawful distribution. Clear evidence this was the intention. Illegal and ultra vires.

Do you need to check to the finest degree of everything you sell? This was accounts nightmare, anything you sell at an undervalue may be open to challenge.

Progress Property - SC- 2010- relied on Scottish case of Clydebank FC. Adopted their approach. Need to look at 'margin of appreciation'. Not black or white. By now means are all undervalue sales void. Court needs to look at purpose- commercial or dodgy? Look at substance- is it just a bad deal? Evidential dispute on the board. 1) in breach of dividend rules- automatically void. That is statuory. 2) people who treat the companies money as their own- always void. Look at in the round. Might be subjective intention. 

What happens when goes wrong?

In common law- s486 preserves the common law remedy. Moxham v Grant 1900- any person recieves unlawful distribution, must repay it if you knew or ought to have known it was unlawful. Actual or constructive knowledge. Doesn't apply to breach of statutory rules. 

s847- statutory remedy for statutory breach- must return the distribution if you knewo r had reasonable grounds to believe it was unlawful. 

It's A Wrap v Gula 2006- CoA- what do you have to have reasonable grounds to believe? Just need to be aware of the facts. Dont need to know that they amounted to a breach. What does reasonable mean? Arden though constructive notice. Chardwick- thought you had to deliberately not know (blind eye test). 

Common law and statute run side by side. 

What about directors who allow this? 

Bairstow v Queens Moat Homes 2000- Directors will be liable if knew unlawful or knew of the facts that made it unlawful, or they must have known or ought to have known. If tick any of these boxes they will be liable. Liable to repay the money. If they paid dividends from improper funds, they've used the wrong funds. Doesnt matter if real funds they could have used. Strict liability. 

Allied Carpets 2001- Directors liability is joint and several. Can go for anyone or all. 

What if they pay half the dividends from the right money and half from the wrong money? 

Inn Spirit v Burns 2002- said whole thing is tainted if any part is improper. Directors have to repay the lot. 

Re Marini 2004- said only have to pay back illegal bit. 

Other remedies for those who recieve down the line- knowing reciept. Can trace down. Unlikely directors will still have the money if its a scam. 

• Share premium is any sum that is obtained above the nominal value. The nominal value of shares is set on incorporation. 
• Everytime a further allotment of shares is made, it must be delivered to the registrar to make sure public record is always up to date. No minimum share capital requirement for private companies. 
• Shares may be partly paid up. Company can make calls at any time for the shareholder to pay the rest of the unpaid share price. Uncommon though. 
• Cant issue shares at a discount. Statutory rule in s590 reflects common law of Ooregum Gold Mining. 
• Alteration of share capital- company needs flexibility to react to changing circumstances. Need special resolution if reduction. s617 says what a company can do. 
• Allotment of shares- affects the balance of power as shares usually have one vote. Directors have power if authorised in the articles or ordinary resolution- s551(1). Must allot to existing shareholders in the equal proportions. 
• Bonus issues- they go to shareholders in equal proportions to their holdings, value of shares hasnt altered. They have more but each is worth less. 
• Can issue shares for non cash consideration as long as done honestly. Ooergum Gold.

• rules to ensure that the company obtains the capital it has purported to raise and that the capital is maintained for the benefit and protection of the companies creditors and discharge of its liabilities. 
• Trevor v Whitworth- landmark case for this- established fundamental principle that there can be no return of capital to the members other than on a proper reduction of capital duly sanctioned by the courts. 
• Broadened now to mean prohibiton on any payment out of or transfer of company assets to a shareholder other than by way of distribution. Also cant give companies assets through gratuitious disposition. 
• European Commission looked into this and found that the costs arising from application arent excessive and doctrine doesnt unduly hinder the conduct of companies. 
• 3 ways to purchase back shares- redeemable shares, purchase back own shares and purchase back out of capital. Redeemable shares cant be issued unless the company has other shares that arent redeemable also- s684(4). Directors must determine terms before shares are alloted. Must be fully paid up and payment made when the shares are redeemed. 
• Disclosure requirement- within 28 days of any shares being purchased delivered to the company, a return must be delivered to the registrar of companies distinguising between treasury shares and other shares. 

• Must state the number and nominal value of the shares and the date on which they were delivered to the company s707(1). 
• Purchase out of capital0 s713(1) directors statement and supporting auditors report must be available before payment is approached by special resolution and public notice must be given to alert creditors. Must show after full inquiry have formed the opinion that there is no grounds on which the company couldnt pay its debts now and the year after. Any payment out of capital must be approved by special resolution. Member who holds shares to which the resolution relates is not an eligible member. Within the week after the resolution passing, must be published in the Gazette saying they have approved the payment, date of resolution, directors and auditors statement available for inspection and creditor may within 5 weeks apply to court to prohibit payment. s719(1). Must be published in national newspaper. Courts tend to refuse redress if there has been a successful special resolution. 
• Reduction of capital- set out in s641(1). Special resolution with solvency statement. Reserve arising on reduction is treated as realised profit and is distributable. Cancellation of share capital lost or unrepresented by available assets- normally to restore reality to the company's accounts. Court must be satisfied that the capital is lost and the loss is permanent. 

• Reduction subject to court confirmation- pass special resolution and seek court confirmation of the reduction. Creditors can object if they dont think their debt will be paid. Re Liberty International-must be more than merely possible but short of probable. s646 puts onus on creditor. 
  
• Main question for court is if the proposed reduction is fair and equitable between different classes of shareholders. Re Ratners Group gave three criteria- 1) all shareholders treated equally in reduction 2) shareholders at the general meeting had the proposals properly explained to them so they can exercise an informed judgment and 3) creditors of the company are safeguarded so that money cannot be applied in anyway which would be detrimental to creditors. Reduction does not amount to variation of class rights and consent of the class to the reduction is not required. 

Distribution to members- 

• label given to transaction does not determine whether it is a distribution or not. Unlawfulness depends on substance not form. Court needs to look at true purpose. Doesnt matter if consciously in breach or just ignorant. On liquidation creditors must be paid in full before any capital can be returned to shareholders. Capital returns must be done as above. 

• CA 2006 Part 23- basic rule is can only make distribution out of profits available for the purpose. Look at last annual accounts. Profits are realised when 'realised in the form of cash or other assets of which can be assessed with reasonable certainty.' 
• Must be in accordance with companys last annual accounts. Allied Carpets v Nethercott- declared dividends on accounts that didnt give a fair view. Company was entitled to judgement for unlawful dividends recieved by a director who knew the accounts were false. 
• Re Marini- distribution out of profits cannot be unlawful. Auditor must have made a report on the accounts and copy must have been circulated to members. 
• Dividend only becomes due once declared. Often decided by ordinary resolution. 
• Directors are trustees and so are jointly and severally liable for the full amount of any unlawful distributions. Liability extends only to the unlawful part. 

• Put down statute and fill with case law.
• s838 - if dividends based on interim accounts, they must be reasonable. Need to be based on accounting principles and properly prepared etc. 
• Only need to repay unlawful bit.