10. Share capital and maintenance
Readings:
- Pettet’s Company Law, pages 348 – 350 (section 13.3A ‘Definitions of share capital’ and section 13.3B
‘authority to issue share capital’) and chapter 14 (excluding section 14.3 E Company purchase of own
shares pp 379-387)
- Returning capital to shareholders
- J. Armour, ‘Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law’
(2000) Modern Law Review 355
- E. Ferran, ‘Creditors’ Interests and “Core” Company Law’ (1999) 20 The Company Lawyer 314
- E. Ferran, ‘Corporate Transactions and Financial Assistance: Shifting Policy Perceptions but Static
Law’ (2004) The Cambridge Law Journal, 63(1), 225
- Simon Mercouris, ‘The Prohibition on Financial Assistance: the Case for a Commercially Pragmatic
Interpretation,’ (2014) Company Lawyer 321
- Modern relevance of the capital maintenance doctrine
- J. Armour, ‘Legal Capital: An Outdated Concept?’ (2006) 7 European Business Organisation Law
Review 5
- John Lowry, ‘The Prohibition Against Financial Assistance: Constructing a Rational Response,’
available on moodle.
- Dan Prentice, ‘Corporate Personality, Limited Liability and the Protection of Creditors’ in Corporate
Personality in the 20th Century (eds Grantham, Ross, Rickett, C. E. F), Hart Publishing, 1998, 99
10.1 Mischief behind the capital maintenance doctrine................................................................2
Why regulate capital?..............................................................................................................2
Capital maintenance as creditor protection.........................................................................2
Company represents that it has the capital available to meet its liabilities..........................2
10.2 Raising share capital............................................................................................................3
Authorised, allotted + issued (s546, CA 2006)........................................................................3
Nominal share capital.............................................................................................................. 3
Public companies: minimum share capital...............................................................................3
Partly paid shares.................................................................................................................... 4
Premiums................................................................................................................................ 4
Discounts................................................................................................................................ 4
Consideration.......................................................................................................................... 5
10.3 Returning share capital........................................................................................................5
Distributions (or dividends)......................................................................................................7
Distributions to members (ss 829-853 CA 06)....................................................................7
Determining distributable profits.........................................................................................7
Distributions cannot be made out of capital (s 851(1))........................................................7
Disguised distributions........................................................................................................7
Aveling Barford v Perion 1989............................................................................................8
Valuing distributions in kind (s 845, CA 06).........................................................................9
Consequences of breach..................................................................................................10
Capital reductions.................................................................................................................. 10
Solvency statement reduction of capital............................................................................10
Effective date of the reduction..........................................................................................11
Financial assistance.............................................................................................................. 12
General financial assistance prohibition............................................................................12
Flaws of the prohibition.....................................................................................................12
, Statutory definition of financial assistance (s 677, CA 06)................................................13
Paradigm cases................................................................................................................ 13
Circumstances when financial assistance is prohibited.....................................................15
10.4 Modern relevance.............................................................................................................. 16
10.1 Mischief behind the capital maintenance doctrine
Objectives of the capital maintenance doctrine
Why regulate capital?
● Limits what you can do with capital
Before limited liability act
● People personally liable when things went wrong - directors not necessarily directly
responsible for consequences of their action
● But gave creditors a remedy - could access individual access
Limited Liability Act 1855
Capital maintenance as creditor protection
● Protecting creditors in the advent of limited liability: how do we protect the creditors
of the company?
● How do we do that?
○ When we raise capital, you have to actually bring that money in - can’t just say
you have share capital and not have the funds
○ Once you have those funds, there are limits on what you can do with it
■ (think about how the SU is structured)
○ Prohibit unauthorised depletion of assets
Company represents that it has the capital available to meet its liabilities
● Creditors can look at the activities that company can undertake → then make
decision on whether to engage w the company or not
Re National Funds Assurance (1878) 10 Ch D 118 [Jessel MR]
● The creditors of a limited company are entitled … to have the capital of the company
reserved for payment of their claims … consequently the repayment by the directors
to the shareholders of the whole or any part of the capital is … unless expressly
authorised by the articles of association, ultra vires and a breach of trust…
○ Ultra vires: void, not voidable
● capital … is to be applied to purposes to which capital is properly applicable, namely,
payment of the debts, obligations and liabilities of the company…
○ To the detriment of the creditors
○ Benefit of limited liability: once you invest, the money will stay there until you
comply with rules that say you can take it out
, How is capital regulated?
● Capital In: Ensuring capital raised is actually obtained
● Capital out: Restricting capital payments out (returns)
10.2 Raising share capital
Authorised, allotted + issued (s546, CA 2006)
● Authorised: how many shares the company can issue
● Allotted: when someone acquires the unconditional right to be registered in respect of
them
● Issued: when the entire process of application, allotment and registration has been
completed. (when those books have been updated)
National Westminster Bank plc v Inland Revenue Commissioners [1995] 1 AC 119
● Facts: tax-driven scheme, flurry as people are trying to take advantage of the old rules
○ 12 March: shares were allotted to shareholders. Everything signed, money paid
○ 16 March: rule change. Transactions had to be complete by then, to make the
most of the change otherwise too late.
■ Rules said: on 16 March, only shares that issued on that date that can
take the benefit of the change.
○ 2 April: people wrote up all the books
● Case highlighted: Difference in allotted vs. issued share capital
Nominal share capital
● Every share must have a fixed nominal (or par) value (s 542(1))
○ Often very low - £1 or less
○ Shares cannot be issued for below this amount but can exceed it (see later)
○ Arbitrary figure normally, not rly reflective of the company
○ Nominal value recorded in the company’s share capital account
● This is recorded in the statement of capital filed with the Registrar (ss 9(4)(a) and 10(2))
● Need some measure bc the way dividends are declared is some fraction of the n
nominal value
● + in insolvency, you’d be lucky if you get anything back
Public companies: minimum share capital
● Public companies are subject to a minimum capital requirement of £50,000 (s763),
must be ¼ paid up
○ Not a capital adequacy requirement: reflects the actual risk they face
○ This is really just an arbitrary figure - but have to meet it to incorporate a plc
● It cannot do business as a public company until the Registrar issues a trading
certificate that it has met this requirement (s 761(1))
○ Certificate can take time. (potential backlogs in Companies House)
● If you have a structure with a new plc in it – allow time and resources for this
certificate to be issued!
Readings:
- Pettet’s Company Law, pages 348 – 350 (section 13.3A ‘Definitions of share capital’ and section 13.3B
‘authority to issue share capital’) and chapter 14 (excluding section 14.3 E Company purchase of own
shares pp 379-387)
- Returning capital to shareholders
- J. Armour, ‘Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law’
(2000) Modern Law Review 355
- E. Ferran, ‘Creditors’ Interests and “Core” Company Law’ (1999) 20 The Company Lawyer 314
- E. Ferran, ‘Corporate Transactions and Financial Assistance: Shifting Policy Perceptions but Static
Law’ (2004) The Cambridge Law Journal, 63(1), 225
- Simon Mercouris, ‘The Prohibition on Financial Assistance: the Case for a Commercially Pragmatic
Interpretation,’ (2014) Company Lawyer 321
- Modern relevance of the capital maintenance doctrine
- J. Armour, ‘Legal Capital: An Outdated Concept?’ (2006) 7 European Business Organisation Law
Review 5
- John Lowry, ‘The Prohibition Against Financial Assistance: Constructing a Rational Response,’
available on moodle.
- Dan Prentice, ‘Corporate Personality, Limited Liability and the Protection of Creditors’ in Corporate
Personality in the 20th Century (eds Grantham, Ross, Rickett, C. E. F), Hart Publishing, 1998, 99
10.1 Mischief behind the capital maintenance doctrine................................................................2
Why regulate capital?..............................................................................................................2
Capital maintenance as creditor protection.........................................................................2
Company represents that it has the capital available to meet its liabilities..........................2
10.2 Raising share capital............................................................................................................3
Authorised, allotted + issued (s546, CA 2006)........................................................................3
Nominal share capital.............................................................................................................. 3
Public companies: minimum share capital...............................................................................3
Partly paid shares.................................................................................................................... 4
Premiums................................................................................................................................ 4
Discounts................................................................................................................................ 4
Consideration.......................................................................................................................... 5
10.3 Returning share capital........................................................................................................5
Distributions (or dividends)......................................................................................................7
Distributions to members (ss 829-853 CA 06)....................................................................7
Determining distributable profits.........................................................................................7
Distributions cannot be made out of capital (s 851(1))........................................................7
Disguised distributions........................................................................................................7
Aveling Barford v Perion 1989............................................................................................8
Valuing distributions in kind (s 845, CA 06).........................................................................9
Consequences of breach..................................................................................................10
Capital reductions.................................................................................................................. 10
Solvency statement reduction of capital............................................................................10
Effective date of the reduction..........................................................................................11
Financial assistance.............................................................................................................. 12
General financial assistance prohibition............................................................................12
Flaws of the prohibition.....................................................................................................12
, Statutory definition of financial assistance (s 677, CA 06)................................................13
Paradigm cases................................................................................................................ 13
Circumstances when financial assistance is prohibited.....................................................15
10.4 Modern relevance.............................................................................................................. 16
10.1 Mischief behind the capital maintenance doctrine
Objectives of the capital maintenance doctrine
Why regulate capital?
● Limits what you can do with capital
Before limited liability act
● People personally liable when things went wrong - directors not necessarily directly
responsible for consequences of their action
● But gave creditors a remedy - could access individual access
Limited Liability Act 1855
Capital maintenance as creditor protection
● Protecting creditors in the advent of limited liability: how do we protect the creditors
of the company?
● How do we do that?
○ When we raise capital, you have to actually bring that money in - can’t just say
you have share capital and not have the funds
○ Once you have those funds, there are limits on what you can do with it
■ (think about how the SU is structured)
○ Prohibit unauthorised depletion of assets
Company represents that it has the capital available to meet its liabilities
● Creditors can look at the activities that company can undertake → then make
decision on whether to engage w the company or not
Re National Funds Assurance (1878) 10 Ch D 118 [Jessel MR]
● The creditors of a limited company are entitled … to have the capital of the company
reserved for payment of their claims … consequently the repayment by the directors
to the shareholders of the whole or any part of the capital is … unless expressly
authorised by the articles of association, ultra vires and a breach of trust…
○ Ultra vires: void, not voidable
● capital … is to be applied to purposes to which capital is properly applicable, namely,
payment of the debts, obligations and liabilities of the company…
○ To the detriment of the creditors
○ Benefit of limited liability: once you invest, the money will stay there until you
comply with rules that say you can take it out
, How is capital regulated?
● Capital In: Ensuring capital raised is actually obtained
● Capital out: Restricting capital payments out (returns)
10.2 Raising share capital
Authorised, allotted + issued (s546, CA 2006)
● Authorised: how many shares the company can issue
● Allotted: when someone acquires the unconditional right to be registered in respect of
them
● Issued: when the entire process of application, allotment and registration has been
completed. (when those books have been updated)
National Westminster Bank plc v Inland Revenue Commissioners [1995] 1 AC 119
● Facts: tax-driven scheme, flurry as people are trying to take advantage of the old rules
○ 12 March: shares were allotted to shareholders. Everything signed, money paid
○ 16 March: rule change. Transactions had to be complete by then, to make the
most of the change otherwise too late.
■ Rules said: on 16 March, only shares that issued on that date that can
take the benefit of the change.
○ 2 April: people wrote up all the books
● Case highlighted: Difference in allotted vs. issued share capital
Nominal share capital
● Every share must have a fixed nominal (or par) value (s 542(1))
○ Often very low - £1 or less
○ Shares cannot be issued for below this amount but can exceed it (see later)
○ Arbitrary figure normally, not rly reflective of the company
○ Nominal value recorded in the company’s share capital account
● This is recorded in the statement of capital filed with the Registrar (ss 9(4)(a) and 10(2))
● Need some measure bc the way dividends are declared is some fraction of the n
nominal value
● + in insolvency, you’d be lucky if you get anything back
Public companies: minimum share capital
● Public companies are subject to a minimum capital requirement of £50,000 (s763),
must be ¼ paid up
○ Not a capital adequacy requirement: reflects the actual risk they face
○ This is really just an arbitrary figure - but have to meet it to incorporate a plc
● It cannot do business as a public company until the Registrar issues a trading
certificate that it has met this requirement (s 761(1))
○ Certificate can take time. (potential backlogs in Companies House)
● If you have a structure with a new plc in it – allow time and resources for this
certificate to be issued!
