Capital and the Financing of Companies

Question 1

What are the 2 statutory capital undistributable reserves?

Answer 1

1. Share Premium

2. Capital Redemption Reserve

Question 2

How are distributable profits calculated?

Answer 2

Distributable profits = accumulated realised profits - accumulated realised losses

Question 3

A company may only make distributions out of distributable profits.
Is this statement true or false?

Answer 3

True.

Question 4

What are the allowable uses of the share premium account?

Answer 4

The allowable uses of the share premium account include, according to s. 130 CA 2006:

• To finance the issue of fully paid bonus shares to existing members
• To write off the preliminary expenses of the company
• To write off the expenses in a share issue

Question 5

The cash received in a bonus issue is balanced by entries to the share capital and share premium accounts.
Is this statement true or false?

Answer 5

False, there is no cash received in a bonus issue as this issue is done for free.

Question 6

In the context of shares in a company, do the expressions “face value”, “par value” and “nominal value” mean the same thing?

Answer 6

Yes, these phrases are all used to refer to the value of a share according to the company’s charter.

Question 7

Is a public company allowed to issue their shares for an amount lower than their face value?

Answer 7

No.

Question 8

What does a company need in order to reduce its share capital?

Answer 8

1. Permission within the Articles
2. A special resolution
3. Court permission

Question 9

Within how many days of creation is a charge to be registered with the Registrar of Companies in order to be valid?

Answer 9

21

Question 10

If there are 2 similar charges on the same asset, the charge which is registered first has priority over the one registered second.
Is this statement true or false?

Answer 10

False, the charge which was created first has priority

Question 11

Are debenture holders paid in priority to shareholders?

Answer 11

Yes.

Question 12

On a liquidation, the floating charge debenture holders are paid in priority to all others.
Their claim “floats” to the top of those people who are owed by the company.
Is this true or false?

Answer 12

False, on a liquidation, fixed charge debenture holders are paid in priority to all others, not floating charge.

Question 13

How does a floating charge differ from a fixed charge?

Answer 13

A floating charge attaches to a class of assets, rather than an individual asset.
The company is also able to freely deal with the assets subject to the charge.

Question 14

How does a fixed charge differ from a floating charge?

Answer 14

A fixed charge attached to an individual asset, rather than a class of assets.
The company is not able to freely deal with the asset subject to the charge.

Question 15

Why is a preference share called as such?

Answer 15

A preference shareholder has preferential entitlements over ordinary shareholders in the following ways:

1. They are paid dividends before ordinary shareholders
2. They receive back their capital investment before ordinary shareholders upon the company’s liquidation

Question 16

Are called-up capital and paid-up capital the same thing?

Answer 16

No.

Question 17

What is a bonus issue?

Answer 17

An issue of shares for free to existing shareholders

Question 18

For public companies, what funds can be used to distribute dividends?

Answer 18

Distributable profits, which can be calculated as accumulated realised profits less accumulated realised losses

Question 19

Does a limited company have its liability for company debts limited?

Answer 19

No, it has unlimited liability

Question 20

Members of a limited company have their liability for company debts limited.
Is this statement true or false?

Answer 20

True

Question 21

What is called up capital?

Answer 21

The money the company has asked for in relation to shares issued

Question 22

Issued or allotted capital is the nominal value of shares currently issued.
Is this statement true or false?

Answer 22

True

Question 23

What type of capital is only called up on a company’s liquidation?

Answer 23

Reserve

Question 24

Preference shareholders generally do not have voting rights.

Is this statement true or false?

Answer 24

True

Question 25

Do preference shareholders get back their capital along with a share of the remaining surplus on liquidation generally?

Answer 25

No

Question 26

The share premium account can be used to write off discounts allowed on any issue of shares.
Is this statement true or false?

Answer 26

False

Question 27

When can private companies issue shares at a discount?

Answer 27

They are able to issue shares at a discount in exchange for non-cash consideration where that consideration has a value lower than the nominal value of the shares issued in exchange.

Question 28

If a public company issues shares at a discount, the directors become personally liable for a fine.
Is this statement true or false?

Answer 28

True