Company Law

2020
Lecture 8

Dr Adolfo Paolini
Lecture 8: Share Capital
 Share Capital and Capital Maintenance

1. Capital: General Information

• Nominal capital: CA 2006 s 542. Private
companies ( no minimum) – Public companies £
50,000 CA 2006 s 763
• Paid up capital
• Unpaid up capital
• Called –up share capital: CA 2006 s 547
• Equity share capital: CA 2006 s 548
 Share Capital and Capital Maintenance

2. Capital Maintenance
• Creditors Protection
• How a company obtains its capital?: Payment for
share capital
• Capital should be maintained
• Doctrine of Capital maintenance precludes the return
of capital to the shareholders.
 Share Capital and Capital Maintenance

• Trevor v Whitworth: “ Paid-up capital may be diminished or lost in the course

of the C’s trading; that is a result which no legislation can prevent; but
persons who deal with, and give credit to a limited company naturally rely
upon the fact that the C is trading with a certain amount of capital already
paid, as well as upon the responsibility of its members for the capital
remaining at call; and they are entitled to assume that no part of the capital
which has been paid to the coffers of the company has been subsequently
paid out, except in the legitimate course of its business”. In this case the
House of Lord rejected the possibility for a company to purchase its own
shares.
• Insolvency Act 1986 s 74
• Guinness v Land Corporation of Ireland (1822) Ch D 349
• Hill v Permanent Trustee Co of New South Wales Ltd [1930] AC 720
 Share Capital and Capital Maintenance

3. How is the capital protected? :

– Payment of shares
– Company acquisition of its own shares
– Financial assistance by a company for acquisition
of its own shares
– Lawful distribution of dividends
– Reduction of Capital
 Share Capital and Capital Maintenance

4. Payment of Shares
– CA 2006 ss 580-591
– Payment creates a fund, used by the company to
trade and carry on business.
– Cannot be issued at discount CA 2006 s 552 see
553
– Payments in Kind: PLC CA 2006 ss 584 -587 and
ss 593-609
 Share Capital and Capital Maintenance

5. Company acquisition of its own shares

• Trevor v Whitworth:“ there can be no return of capital to the
members other than on a proper reduction of capital duly
sanctioned by courts”. At issue was whether or not a company
could validly purchase its own shares. HL: rejected any such
possibility- a company does not have such power under
CA1985- even if so authorised by the articles of association.
• CA 2006 s 658
• CA 2006 s 690 , 685 686,689,691, 714 ss
• Exceptions: s 659
 Share Capital and Capital Maintenance

6. Redemption and Purchase CA ss 684-723

• It must be authorised by the articles of association – special, ordinary
or written resolution.
• On redemption shares are cancelled so the capital is reduced
• Redeemable shares cannot be issue unless the company has other
shares which are not redeemable; and after the purchase back the
company must have no redeemable shares.
• They must be fully paid.
• The issue of number of members.
• Market and off market purchase CA ss 700-701
• Power of private companies to redeem or purchase own shares out
of capital
 Share Capital and Capital Maintenance

7. Financial assistance by a company for acquisition of its own shares

• CA ss 677
• Public Companies s 678
• Sanctions s 680
• Exceptions ss 681, 682
• Private companies are no longer prohibited for giving financial assistance
fpt the acquisition of their own shares or those of parent companies.
• See Belmont Finance Corporation Ltd v Williams Furniture Ltd (no.2)
• See Brady v Brady for the judicial interpretation of the exception rules.
 Share Capital and Capital Maintenance

8. Lawful Distribution of Dividends and Assets

• Dividends cannot be paid out of capital. This is ultra vires
and void.
• CA 2006 part 23 ss 829 ss
• Available profits
• Must be in cash Wood v Odessa Waterworks (1889) 42 Ch
D 636, unless articles provide otherwise.
• Directors should report what is available for dividends: CA
2006 s 416(3)
 Share Capital and Capital Maintenance

• Aveling Barford Ltd v Perion: Company did not have

distributable profits. Company decided to sale property
undervalue to another company controlled by a majority
shareholder. Held: It was ultra vires and void.
• Dimbula Valley (Ceylon) Tea Co Ltd v Laurie: Increase the
value of assets and distributed as profits. Was it a realised
profit? It is not possible nowadays since profits must be
realised.
• Depreciation is a realised profit. Lee v Neuchatel.
 Share Capital and Capital Maintenance

• Dividends Distribution: S 830

• Accounts properly prepared giving a true and fair view of the
financial situation of the company. S 836
• Bairstow v Queen Moat Houses Plc CA: the accounts had not
been properly prepared thus they did not give a true and fair
view. This was a breach of requirements leading to unlawful
distribution. Company’s accounts gave the impression of
profits. Directors argued that profits were available in a wholly-
owned subsidiary company which in turn were going to be
paid to the parent one, albeit they accepted that the former did
not have profits to be distributed in the form of dividends.
 Share Capital and Capital Maintenance

• Realised and Urealised Profits s 853(4). FRS 18

• Distribution in Kind s 845-846
• Public Companies S 831
• Precision Dippings Ltd v Precision Dippings Marketing Ltd:
Auditor’s statement if required CA 1985 271(4). In this case no
auditor’s statement qualifying the accounts was presented.
Paid £ 60,000 and the company Dippings later went into
liquidation. After distribution auditors issued a report as to
ratify the validity of those dividends. Liquidator successfully
claim those dividends from Dippings marketing.
 Share Capital and Capital Maintenance

8.1 Liability for wrongful distribution

• It cannot be ratified
• CA s 847 (1)(2)(3)
• Precision Dippings. Also Allied Carpets Group Plc v
Nethercott.
• Are directors liable?
• Yes they are. This could lead to a misappropriation of
C’s assets
Share Capital and Capital Maintenance

• Leading authority Re Exchange Banking Co (Flitcroft’s case)

Facts: Directors included amongst C’s assets a number of bad
accounts with the intention of giving good appearance and
profitable expectations. At General meeting they
recommended distribution of dividends over a period of few
years. Company became insolvent and went into liquidation.
Court found directors liable to repay the moneys improperly
distributed. Is the director liable if he proceeds in good faith?
• Bairstow v Queen Moat Houses Plc
 Share Capital and Capital Maintenance

9. Reduction of Capital
• CA ss 641
• CA s 642 Reduction of capital supported by solvency
statement
• It must be authorised by the Court CA s 645-649
• Re Jupiter House Investments (Cambridge) Ltd; Facts: In this
case the company could not prove that the loss was
permanent. The court authorised the reduction subject to the
fact that the company should not distributed this capital (if
recover) as dividends. This money had to be place to a capital
reserve.
 Share Capital and Capital Maintenance

• CA s 646 Creditors entitled to object to reduction

• Registration S 649
• Public Companies reducing below the limits CA 2006
s 650
• Effect of Reduction of Capital: ss 652-653