Ch 12 - Company Finance

Question 1

Explain the difference between issued capital, paid-up capital and unpaid capital.

Answer 1

Issued capital – the total amount of capital issued by the company to date (a company may not issue all of its
capital at once) the amount of capital issued is stated in the registration documents and thereafter in the
annual return);
Paid-up capital – the amount of the issued capital that has already been paid for in relation to partly-paid
shares;
Unpaid capital – the amount of the issued capital that is still outstanding in relation to partly-paid shares – it is
the difference between the amount paid and the nominal value of the shares.

Question 2

Differentiate between Ordinary Shares and Preference Shares.

Answer 2

Ordinary Shares (equity shareholders)
Risk takers - these shares bear the burden of the company’s fortunes as they are the last to be paid upon
the liquidation of the business;
Possibility of capital growth on liquidation - right to a share of any available assets upon winding-up;
Return (dividend) - dependent upon company performance;
Ability to influence company policy by exercising voting rights at meetings (AGM/EGM) relating to company
business;
Preference Shares
Less risk than ordinary shares, but still risky - only repaid upon liquidation once all external debt has been
satisfied;
There is no capital gain upon the liquidation of the company if there are available assets upon winding-up,
they are only entitled to repayment of their original investment sum but this is paid in priority to ordinary
shareholders;
Preferential right to a dividend – fixed percentage return on investment – this right is normally cumulative so,
if no profit is declared in any particular year, the right to a dividend may accumulate to the next profit period;
Generally no ability to influence company policy as they have no voting rights.

Question 3

Define a debenture.

Answer 3

Debenture: this was defined in Levy v Abercorris State & Slab Co. (1887) as a document that creates a debt
or acknowledges it.
The debenture states the terms on which the company has borrowed money and is issued by the company to
the lender.
It will state the principal sum of money to be repaid and the sum of interest

Question 4

Explain the various categories of debentures that can be issued by a company

Answer 4

Single Debenture – this document will consist of a single loan made between the company and the lender –
the lender may be a bank providing a long term overdraft facility to the company;
Series of Debentures – this consists of a series of separate loans made on different dates by different
lenders to the company – each of these loans comprises a part of an overall loan and each debenture in the
series ranks equally in their right to security and repayment;
Debenture Stocks – this loan is used by public companies only – where instead of a company creating a
series of separate debentures as above, a company will create debenture stock.
This stock creates a loan fund, which a number of lenders (the public) will invest money in on exactly the
same terms and conditions as stated in the debenture document – the terms of the borrowing are set out in a
single Trust Deed.

Question 5

List the priority of payment of company debts upon liquidation.

Answer 5

the costs of liquidation (liquidators fees and expenses);
debentures secured by fixed charges (in order of creation & provided they are registered);
preferential debts (occupational pension schemes and employees of companies);
debentures secured by floating charges (in order of creation & provided they are registered);
unsecured creditors;
members dividend;
shareholders (first preference then ordinary).

Question 6

Explain the three main components of a ‘share’

Answer 6

Share: a share represents an investment in a company it was defined in Borland’s Trustee v Steel Bros &
Co Ltd (1901) as “… the interest of the shareholder in the company measured, for the purposes of liability and
dividend, by a sum of money”.

Question 7

Outline the rules regarding issuing shares at a discount

Answer 7

Shares at a discount: there is a general prohibition in company law in relation to issuing shares at a discount.
There are two exceptions to the rule:
(i) where the discount arises as a consequence of paying any commission on the issue of shares;
(ii) where shares are issued for non-cash consideration (provided there is an independent valuation of the asset
if the company is a public limited company.

Question 8

Outline the differences between shareholders and debenture-holders

Answer 8

Role
A shareholder is a member and creditor of the company.
A debenture holder is a creditor of the company.
Rights
Members have rights ‘in’ the company.
Creditors have rights ‘against’ the company.
Participation
Shareholders are involved in the company as they have the right to attend meetings, and possess voting
rights that can be exercised at these meetings (only ordinary shareholders have the right to vote).
Debenture holders have no role in the company and cannot attend company meetings or vote (although they
may include a restrictive covenant in the debenture, limiting the rights of the company until the loan is
repaid).
Cost
Shares cannot be sold at a discount.
Debentures can be sold below their nominal value, i.e., at a discount.
Capital growth
Shareholders have a right to capital growth (if there is any surplus capital on liquidation).
Debenture holders have no right to capital growth. They only have a right to repayment of the principal sum
plus interest.
Return
Shareholders have a right to a dividend payment if the company is making a profit and it is declared. If not,
shareholders receive no dividend return.
Debenture holders have a right to repayment plus interest on the loan even if the company is making losses.
Risk
Shareholders are the last to be paid on liquidation of a company so they carry a higher risk.
Debenture holder’s debt is satisfied before shareholders so their financial investment is considered more
secure.