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Capital and Its Maintenance (The Use of Shares (Allotment of Shares…
Capital and Its Maintenance
Capital
Starting Up
Public Companies: EU Directives
Private Companies: Domestic Law
In the UK require no minimum share capital
More vulnerable to the pressures of monthly loan repayments
Companies with higher amounts of equity - fair better
Encourages enterprise
The Use of Shares
Par Value
S542 Companies Act 2006
A nominal value below which a share cannot be issues expect if it's a legitimate employee share scheme
The Company Register: S9 Companies Act 2006
Most contain the following information
Aggregate Nominal Value
The different types of share class
Number of shares taken by subscribers
The amount of paid up and unpaid shares
Prohibition of Issuing at a Discount
Allotment of Shares
Directors are responsible for this but are restricted to allot only to raise capital
Defending a hostile takeover will be an improper purpose (breach of duty)
Allotment is subject to a claim for unfair prejudice where the directors know that some shareholders may not be able to afford the new shares
Private companies may opt out of these constraints if there is only one class of shareholders
Pre Emption Rights
Existing shareholders in a particular class should be offered new shares first - Maintain their power base in the company
Failure of the company not to comply with such right may lead to a claim for unfair prejudice
Exceptions
Employee share Scheme
Excluded by Articles in Ltd
Non cash consideration
Where the allotment is a class right
Bonus Shares - Follow the dividend but this is often the same
Disapplication of the right
Capital Maintenance
Reducing Share Capital
Company cannot reduce its share capital which is designed to protect both the interest of its shareholders or creditors
Need to go through the correct process of obtaining shareholder approval
Principles are designed to ensure that the company's capital base is both secure and transparent
Purchase of Company's Own Shares
Gives a company flexibility by raising capital for a set period of time
Fund a new venture or support temporarily and existing one without taking out a loan
These shares are known as
REDEEMABLE SHARES
Procedure
Private Company:
Requires a provision in Articles
Capital may be used
Public Company:
Requires provision in Articles and must also have shares that re not redeemable
Only distributable profits can be used to buy back shares
Directors must state the terms and conditions of the redemption and these must be given prior to allotment
Shares must be fully paid for
Notice to Registrar:
Once the shares have been redeemed within one month, the Registrar must be informed of the buy back and a statement of capital must be given.
Non- Redeemable Shares
Liquidation
Voluntary Liquidation
1: Members Voluntary Liquidation
A special resolution of members (75%) - required and a notice of the winding up has to be advertised in the London Gazette within 14 days of resolution being passed
This type of winding up occurs where the company is solvent and the members or shareholders want to cease trading
Directors must make a statutory declaration that the company will remain solvent for the next
12 months
Reasonable length of time for the winding up to be completed
Means directors are exposed to personal liability if the company cannot pay any debts - during the period
2: Creditors' Voluntary winding up
Were the directors refuse to make a declaration of solvency
Done where the company is of doubtful solvency or where the solvent position of the company is deteriorating
Insolvency practitioner is appointed
Liquidator then becomes responsible for the running of the company
Director and shareholder powers cease
Compulsory Liquidation
Occurs where the company is insolvent and is unable to pay its debts
Balance Sheet Insolvency
Ultimate Insolvency
Cash flow insolvency
A creditor who is owed money petition the winding up order
The grounds are:
The company is unable to pay its debts
The court is of the opinion it is just and equitable so to do
Deferring Proceeding
Occurs when the debt in question is in dispute - liquidation proceedings could be used to unfairly enforce a debt by threatening the company
Legitimacy of the petition must be resolved first
Order of Distribution
Lenders who have loaned money prior to the liquidation to keep the company going e.g, pay employees
Ordinary creditors
Preferential creditors including employees pay and pension contributions. Maximum is only £800 per employee
Deferred creditors, usually connected to the company directly or through marriage
Expenses of winding up including solicitors and accounts fee
Surpluses will go to the members pro rata
Corporate Rescue
Pro Debtor rules
Include Company Voluntary Arrangements and Administration - aim maintain company's continued survival
Pro Creditor Rules
Essentially Receivership and Liquidation and the objective here is to maximise the sale of assets to fulfil the creditors' loans
Company Voluntary Arrangements
Company cannot afford to pay its debts at the current rate
Offer its creditors an arrangement whereby the creditors are paid less over a longer period of time
Essentially this is restructuring debt
Small companies - Insolvency Act 2000 allows for a moratorium to accompany a CVA which means that once in place, no creditor may enforce their particular credit against the company
Larger Companies - This does not apply and they would only get a moratorium against their CVA if it were part of an Administration Order
Administration
Pro debtor device designed to reduce the company if on the blance of probabilities this can be achieved
Can work with a CVA
Larger companies it can provide a moratorium or breathing space - while the company re negotiates its debts with creditors
The administrator
Always an officer of the court
Is an agent of the company
Not appointed if the company is already in compulsory winding up or the shareholders have voted to voluntarily wind up the company
Objectives
Try and rescue the company by inter alia, restructuring debt or making redundancies
If this is not possible then to ensure that creditors with fixed charges are paid as efficiently as possible and that assets are maximised to complete this objective
The Administrator in Action
Becomes central to the management
Name must appear on all company correspondence
Powers are wide and include setting aside transactions deemed at an undervalue or a preference
Bringing the Administration to an End
After one year by the court unless an extension is requested
Any time during that period by the Administrator, if they believe the administration has worked/ objectives cannot be achieved by administration
Ring Fencing Funds for Unsecured Creditors
Preferential creditors should be paid after costs of the administration and fixed charge creditors but before floating charge creditors
List of preferential creditors is very short (usually only employees)
Tax man no longer a preferential creditor
Loan Capital
Instead of shares where private companies have few assets to support the allocation of shares for capital growth
Loan capital is the option for most companies but lenders want
security
Security
Known as a charge
Fixed
Floating