Capital And Financing

Question 1

Definition of share capital

Answer 1

“Is the interest of a shareholder in the company measured by a sum of money for the purpose of a liability in the first place, and of interest in the second but also consisting of a series of mutual covenants entered into by all the shareholders”- Borlanda trustee v steel bros and co ltd (1901)

Question 2

Common classes Of shares

Answer 2

Ordinary 
Preference 
Redeemable 
Convertible 
Cumulative

Question 3

Minority protection

Answer 3

S633- the holders Of 15% of the nominal value of that class, who didn’t consent to the variation may ask the court to cancel the variation within 21days of the passing of the resolution

Question 4

Issue of share capital

Answer 4

Comprises share capital that has actually been issued, released or sold by the company

Question 5

Paid up share capital

Answer 5

The amount which shareholders have actually paid on the share issued

Question 6

Called up share capital

Answer 6

The amount unpaid share capital which has been called for from shareholders but not yet paid

Question 7

Uncalled share capital

Answer 7

The amount that has not yet been called for From shareholders and therefore also remains unpaid

Question 8

Statutory pre-emption rights

Answer 8

New shares offered to exiting shareholders in proportion to their shareholders-raises new funds
Offer open for 21days

Question 9

Bonus issue

Answer 9

Normally issued at no cost to the shareholders in which case do not raise any new funds
Eg a company may issue 2 free preference shares for every ordinary share capital

Question 10

Rights issued

Answer 10

New shared offered to existing shareholders in proportion to their shareholdings to raise new funds-must be made in writing

Question 11

OG acquisition

Answer 11

When fresh shares are newly issued by a company, referred to as an allotment and issue of shares

Question 12

Derivative

Answer 12

Takes place where issues shared are acquired from an existing shareholders by another person

Question 13

Authority

Answer 13

Directors need authority in order to allot shares- this may be given
By the articles
By passing an ordinary resolution

Question 14

Issue at discount

Answer 14

Every share has a nominal value which is fixed at the time of incorporation at the company in the statement of capital and initial shareholding. The nominal value of the share represents the extent of a shareholders potential liability

Question 15

Issue at premium

Answer 15

Where a share is allotted at value greater then nominal, the excess over the nominal value is share premium. 5£8/ is the market value of the share is greater than the fixed nominal value

Question 16

Paying for shares- private companies

Answer 16

Private companies may issue shares for non-cash consideration. The court will interfere with the valuation only if there is fraud or the consideration is “illusory past or patiently inadequate”

Question 17

Paying for shares- public companies

Answer 17

S584-subscribers to the memorandum must pay cash for their subscription shares
S585-payment for shares must not be in the form of work or services
S586-shares cannot be alloyed until at least quarter of their nominal value and the whole of any premium have been paid
S587-non-cash consideration must be received within 5yrs

Question 18

Capital maintainance

Answer 18

The capital maintenance concept states that a profit should not be recognized unless a business has at least maintained the amount of its net assets during an accounting period

Question 19

Why to reduce capital

Answer 19

No longer needs it 
-May be a class of shares with unattractive rights attached which the company wishes to dispense with

Question 20

Share capital -general rule

Answer 20

A limited company cannot reduce its share capital
However
In order to reduce its share capital a company may
-reduce / cancel liabilities
-return capital in excess of the company’s needs
-cancel the paid-up capital that is no longer represented by the assets

Question 21

Procedure for public companies

Answer 21

• pass a special resolution
• apply to court to confirm the special resolution
• if reduction involves one of the first 2 methods court must require company to settle a list of creditors entitled to object
• the court must not confirm the reduction until it is satisfied that all creditors have either consented to the reduction/had their debts discharged /secured
• the company must file documents with the registrar. If the share capital of a public company falls below £50000 it must re-register as a private

Question 22

Procedures for private company

Answer 22

• pass a special resolution supported by a solvency statement
• the solvency statement is a statement by each of the directors that the company will be able to meet its debts within the following year
• a solvency statement made without reasonable grounds is an offence
• copies of the resolution, s.s and a statement of capital must be filed with the registrar witching 15days

Question 23

Treasury shares

Answer 23

Treasury shares are the shares which are bought back by the issuing company, reducing the number of shares outstanding on the open market.

Question 24

Treasury shares -general rule

Answer 24

Shares which are purchased by a company must be cancelled and the amount of the company’s share capital account replaces by the nominal value of cancelled shares

Question 25

Distribution

Answer 25

A company can only make a distribution eg pay a dividend - out of profits available for that purpose, ie distributable profits. There is an absolute prohibition on the payment of dividends out of capital

Question 26

Distributable profits

Answer 26

The accumulated realised profits less the accumulated realised losses

Question 27

Consequences of an unlawful dividend

Answer 27

The company can recover the distribution from:

• shareholders who knew/had reasonable grounds to know the dividend was unlawful
• the auditors of the dividend was paid in realiance on erroneous accounts

Question 28

Loan capital

Answer 28

Comprises all the longer term borrowing of a company :

• permanent overdrafts at re bank
• unsecured loans either from a bank of other party
• loans secured on assets either from a bank of other party

Question 29

Debentures

Answer 29

a long-term security yielding a fixed rate of interest, issued by a company and secured against assets.

Question 30

Fixed charges

Answer 30

Security or charge is granted over specific and identifiable property
It has a limited ability to do so

Question 31

Floating charges

Answer 31

It is free to dispose of its assets in the ordinary course of business

Question 32

Crystallisation

Answer 32

A floating charge becomes fixed to the particular assets that are owned by the company at the time when certain events occur that will cause this to happen, either under statute or under the terms of issue or the charge

Question 33

A floating charge become fixed when

Answer 33

• The appointment of a receiver by a floating charge creditor -s53 and s54 of the insolvency act 1986 where this is still permitted
• the commencement of the winding up of the company - s463 of the companies act 1985

Question 34

Advantages of floating charge

Answer 34

• the company can deal freely with the assets

- a wider class of assets can be charged

Question 35

Disadvantages of floating charge

Answer 35

• the value of the security of uncertain until it crystallises
• has lower priority In order of repayment then a fixed charge