71. Power of company to alter its share capital Flashcards
- Power of company to alter its share capital
General overview
[71.01] This section provides for the lodgment of notice of alteration in the prescribed form in the event that the company alters its share capital. Generally, where share capital is altered in the manner provided for by s 71, there is no return of capital to shareholders and the capital maintenance rule is not infringed.
Alteration of share capital
[71.02] The share capital of a company may be altered in the manner stated in subsection (1), subject to the authorisation of its constitution, viz. by consolidation, subdivision, and a conversion into stock and reconversion back into shares. In Re Home and Foreign Investment and Agency Co Ltd [1912] 1 Ch 72, Ch D, a company subdivided its shares into smaller shares so that the amount paid and unpaid on the shares remain the same. It is not a reduction of capital. It requires an ordinary resolution of the general meeting. A consolidation or subdivision of different classes of shares requires a special resolution: Re JA Nordberg Ltd [1915] 2 Ch 439, Ch D . When a listed company alters its share capital, approval of the securities exchange is required and proper professional advice is needed
Forfeiture of shares
[71.03] Most companies’ constitutions provide that shares may be forfeited according to the situations prescribed in the regulations: reg 32 to 39 of the Companies (Model Constitutions) Regulations 2015. A forfeiture of shares is not treated as a diminution of capital. The company does not pay anything on a forfeiture of shares; it simply takes them away from a shareholder who cannot pay his calls: Re Dronfield Silkstone Coal Co (1880) 17 Ch D 76, CA. The power to forfeit shares must be exercised bona fide and only when the member is unable to pay for his shares. Shares cannot be forfeited merely because the members are unwilling to pay for the unpaid portion of the shares: Re Agricultural Cattle Insurance Co, Stanhope’s case (1866) LR 1 Ch App 161 , Lord Chancellor’s Court; Re Esparto Trading Co (1879) 12 Ch D 191, HC . Once the share is forfeited, the shareholder’s liability is terminated and unpaid calls cannot be recovered, unless the articles provide for this: Re Blakely Ordnance Co, Stocken’s case (1868) 3 Ch App 412. Where the parties issued the shares to “dress up” the capital of a company in order to qualify the company to submit a tender, the directors may not forfeit the shares
Surrender of shares
[71.04] Shares may be surrendered by a shareholder: see Trevor v Whitworth (1887) 12 App Cas 409 ; and the power has to be exercised bona fide and not to relieve the shareholder from his liability to pay calls: Bellerby v Rowland & Marwood’s Steamship Co [1902] 2 Ch 14, CA . When a company has performed an act which is ultra vires by removing the names of surrenderors of shares from the register, the surrender being illegal, null and void in the circumstances in which it was made, the company cannot rely on lapse of time or acquiescence to validate what was illegal, null and void: Bellerby v Rowland & Marwood’s Steamship Co [1902] 2 Ch 14, CA . Shares may be surrendered in exchange for new shares so long as it is a bona fide scheme and not to relieve shareholders from liability: Eichbaum v City of Chicago Grain Elevators Ltd [1891] 3 Ch 459, Ch D . Shares that are surrendered will not be cancelled but its rights are held in abeyance. The issue of preference shares in exchange for ordinary shares which are bona fide surrendered for the benefit of the company and not to enable shareholders to escape from their liability is not a reduction of capital
Cancellation of shares
[71.05] Any capital reorganisation under s 71 does not amount to a reduction of capital: s 71(2). A court will sanction a scheme to cancel capital that has been lost or is unrepresented by available assets: Re Palace Hotel Ltd [1912] 2 Ch 438, Ch D ; affirmed in Re Schweppes [1914] 1 Ch 322, CA ; overruled Re Doecham Gloves Ltd [1913] 1 Ch 226, Ch D . A cancellation of paid-up capital that has not been paid in cash is a reduction of capital: Re Omnium Investment Co [1895] 2 Ch 127, Ch D . A valid allotment of shares cannot be cancelled by a resolution of the company: Ho Kim Hoi v The Anglo-American Corp Ltd [1938] (1877) MLJ 14 ; applied Evan’s case (1866-67) LR 2 Ch App 427; Re London and Provincial Consolidated Coal Co (1877) 5 Ch D 525 ; Alexander v Automatic Telephone Co (1900) 2 Ch 56 ; Mackey’s case (1875) 1 Ch D 247 . A reduction of capital paid on preference shares without calling a meeting of preference shareholders is valid
