COMPANY LAW:

1
 CAPITAL

2
 INTRODUCTION
• We will consider issues on capital of a company and the doctrine of maintenance
of capital
• The law ensures that shareholders pay the price for their shares in money or
moneys worth and the capital is not illegally returned to them

LEARNING OUTCOMES
• Explain the objectives of doctrine of maintenance of capital
• State the rule proscribing shares being issued at a discount
• Describe the rules relating to dividend payments
3 • Procedure for reducing capital
• The regime governing financial assistance for the purchase of shares
 OVERVIEW – THE MAINTENANCE OF CAPITAL DOCTRINE

• The idea is to maintain “share capital” (investment) of a company so it shows the

accurate picture of a company’s finances. It is a yardstick of profitability
• Capital is used to further the commercial activities, and can result in poor business
decisions causing losses and nothing can protect the investors
• Shareholders will buy shares with hope that the value of shares increase when the
company prosper & hope to get a dividend from the company based on the number
of shares held
• Eg: Share prices is made up of 2 elements:- i.e. nominal value & premium of shares
4 • Q: How does a company maintain it’s share capital? It differs between private &
public company
• This topic is a mixture of legal principals and accounting rules
 RAISING CAPITAL: SHARES MAY
NOT BE ISSUED AT A DISCOUNT

• S.552 CA – shares cannot be issued at a discount

• The full nominal value has to be paid. The payment

terms need not be full, it can be deferred, but the
outstanding balance has to be paid back – this is
5 known as “paid up” & “unpaid up capital”
6 Ooregum Gold Mining Company v Roper [1892]

• The Ooregum Gold Mining Co of India issued 120,000 shares at £1 each. Shareholders
said they wanted to sell on the shares for 5 shillings, (i.e. 25 new pence) one quarter of the
value the shares were issued at, but that the buyers would be credited with a full £1 in the
company. This would mean that shareholders would get a 15 shilling (75 new pence)
discount. At the time of the litigation, the share price stood at £2 14s. The shareholders
at the time of the purchase (who now wanted money to pay off a debenture) even though
they had voted for the issue, then turned around to the buyers and argued that shares
were prohibited from being issued at a discount, and that the transaction was void.

• The House of Lords agreed that shares must not be issued at a discount. It was concerned
with the potential effects on creditor
7

• The shares payment can be in money or money’s worth (i.e. goods

or services) - Re Wragg Ltd [1897] [Note: This only applies to
private co.]
• For public co., if shares are bought with non cash terms –
independent valuation is required (s.593 CA)
• s.593(3) CA: Failure to comply – shareholder to pay in cash +
interest
• The idea is to stop public co. from issuing shares at a discount
8 Re Wragg Ltd [1897]

Facts:
 Mr Wragg and Mr Martin sold their omnibus and livery stable business to a newly
incorporated company for £46,300. The company paid by issuing debentures and fully paid
shares to Mr Wragg and Mr Martin. The liquidator of Wragg Ltd claimed that the company
was (in return for the share issue) worth £18,000 less than the board had decided to pay

Held:
 The transaction was wholly legitimate.
 RETURNING FUNDS TO SHAREHOLDERS

 DIVIDENDS
• Any profitable organizations may want to pay out dividends to its
shareholders or instead re-invest the profits back into the business
• Part 23 CA 2006 – dividends can only be paid out of
accumulated/realized profits - s.830 CA
• It should not be a situation where dividend is paid out till it
reduces the company’s net access – this amounts to ultra
vires/unlawful
9
• A director who knew that the payment amounted to breach – have
to bear the losses
10 Bairstow v Queens Moat Houses plc [2001];

 Facts:
 the directors, who acted on the company’s 1991 accounts that incorrectly showed inflated
profits, paid dividends that exceeded the available distributable reserves.
 The Court of Appeal held that their liability was not limited to the difference between the
unlawful dividends and the dividends that could have been lawfully paid. Directors owe
fiduciary duties to the company and therefore have trustee-like responsibilities arising out
of their duty to manage the company in the interests of all its members. They were
therefore ordered to pay the company over £78 million.
11 Progress Property Co Ltd v Moorgarth Group
Ltd
 The appellants appealed against rejection of their claim that there had been an unlawful
distribution of capital when the appellant had sold the share capital of a subsidary at an
undervalue to the respondent purchaser. The valuation had miscalculated the existence of
an indemnity against liability to repair leasehold properties.

Held: The appeal failed. The question of whether there had been an unlawful distribution
of capital at common law was an issue of the substantial effect of the transaction, and not
its form. An entirely objective view would be repressive and unworkable, and the court
should look to the true nature and purpose of the transaction. In this case the parties had
intended a true commercial sale and purchase, and it was not to be set aside.
12 It’s a Wrap (UK) Ltd v Gula (2015)

 the liquidator sought repayment of dividends paid to the defendants who were the sole shareholders and
directors of the company. During a two-year period in which there were no profits available for
distribution, the company’s accounts showed that dividends had nevertheless been paid to the defendants.
When the company went into liquidation, the liquidator claimed that the dividends had been paid in
contravention of s.263(1) CA 1985 (now s.830(1) CA 2006) and were therefore recoverable under s.277
CA 1985 (now s.847 CA 2006). The defendants argued that the sums in question were paid to them
as remuneration and only appeared in the accounts as ‘dividends’ because they had been advised
that this was tax efficient.
 The court dismissed the liquidator’s claim. On the evidence it was clear that the defendants had sought to
gain a proper tax advantage and had not deliberately set out to contravene the Act. The words ‘is so
made’ contained in s.277(1) (now s.847(2)) required that the defendants knew or had reasonable grounds
to believe not just the facts giving rise to the contravention but also the legal result of the contravention.
 Court of Appeal reversed the judge’s decision and held that the defendants’ ignorance of the law
was no defence
13 Re Exchange Banking Co, Flitcroft’s Case
(1882)
 Facts:
 The directors of the Exchange Banking Company had presented account reports before
shareholder meetings, which were untrue. Between 1873 and 1878 they paid half yearly
dividends totalling £3,192 when they knew items in the accounts were bad debts,
irrecoverable and consequently there were no distributable profits. The shareholders
acted on the reports and declared dividends. The liquidator issued a summons against
five former directors.
 Held:
 The directors were liable to repay the unlawful dividends.
 ILLEGAL RETURNS OF CAPITAL
 DISGUISED DISTRIBUTION
• This is hidden/extra distribution made to shareholders which one do not
deserve and must be returned back
• Case: Re Halt Garage (1964); Aveling Barford Ltd v Perion Ltd (1989);

14
15 Re Halt Garage (1964);

 Mr and Mrs Charlesworth started Halt Garage (1964) Ltd. After Mrs Charlesworth became
ill, the business declined, from £106,000 turnover in 1967 to voluntary liquidation in 1971.
From 1968 to 1971 Mr Charlesworth worked full time and got remuneration as a director,
while Mrs Charlesworth did not work due to her illness but was still paid. The liquidator
claimed this represented an illegal reduction of capital.

 Held:
 Only £10 out of the £30 per week that had been paid to her while she was ill was genuine
remuneration. She was therefore liable to repay the balance.
16 Aveling Barford Ltd v Perion Ltd (1989);

 Facts:
 Mr Lee owned and controlled both Aveling Barford Ltd and Perion Ltd. Aveling Barford
owned a country house and 18 acres of land in Grantham, which it sold to Perion £350,000,
rather than the £1,150,000 it had been valued for prospective mortgagees. Aveling Barford
subsequently went into liquidation, and the liquidator sued to have Perion be declared
a constructive trustee of the proceeds realised by Perion on the resale of the property.
 Held:
 It was a breach of the directors' fiduciary duty to sell the property at an undervalue.
Given the relationship between the parties, the sale at an undervalue represented a
distribution, and as the sale amounted to an unlawful reduction of capital, it was
incapable of ratification. The transferee was therefore accountable as a constructive
trustee. ‘This was a dressed up distribution’, it was ultra vires
 ILLEGAL RETURNS OF CAPITAL

 REDUCTION OF SHARE CAPITAL

• Why reduce share capital? What is the point of having so much share
capital when there is limited net assets?
• By reducing share capital, it reflects the actual net access the company
owns. It will enable the company to pay out dividends
• Under the new CA 2006, a lot of burdensome requirements for private
companies has been removed. For public companies it remains the same
• Gen rule: s.641(1) CA 2006 – a private company may reduce share capital
by special resolution + solvency statement OR by obtaining court order
17
• Public companies - only can obtain court order to reduce share capital
 ILLEGAL RETURNS OF CAPITAL

 REDUCTION OF SHARE CAPITAL

(PRIVATE CO.)
• s.642 CA - s.644 CA: spells out procedure for private companies to reduce
their share capital.
• Note: D must make the solvency statement not more than 15 days before the
special resolution is passed
• If its is via written resolution - a copy of solvency statement must be sent to
every member
18 • If resolution is via meeting – a copy of solvency must be made available to
members throughout the meeting
 ILLEGAL RETURNS OF CAPITAL

 REDUCTION OF SHARE CAPITAL

(PRIVATE CO.)
• s.643 – the “solvency statement” made by D is after taking into consideration
the following:
i) There is no ground for the company to be unable
to pay its debts;
ii) Even if winding up were to take place, the
company can pay its debts in full within 12
19
months
• Note: If a D made a solvency statement wrongfully, he/she has committed an
offence under s.643(4) and which penalties are spelled out under s.643(5) CA
2006
 ILLEGAL RETURNS OF CAPITAL

 REDUCTION OF SHARE CAPITAL

(PRIVATE CO.)
• s.644 – states the filing requirements for reduction in share capital – i.e. a
company must file to ROC the following within 15 days after special
resolution is passed:
i) copy of solvency statement;
ii) statement of capital & compliance
20 iii) special resolution
 ILLEGAL RETURNS OF CAPITAL

 REDUCTION OF SHARE CAPITAL

(PUBLIC CO.)
• As mentioned, public co. can only obtain court order to reduce share capital
• s.645 & s.646 CA 2006 – specify the procedures for making such an application for
an order confirming the reduction of share capital, including the creditors rights to
object
• The courts will ensure that each creditor consent to the reduction, if not the court at
its discretion may order the company to secure his debt or claim – s.646(4) CA 2006
21 • S.648 – The courts can make order for reduction of capital as it deem fit. When this
happens certain shares will be cancelled or reduced in value.
• Test: Whether the reduction of capital will strike a fair balance with interest of
different classes of shareholders? Who is to be repaid first based on the classes?
• Case: Re Chatterley-Whitfield Collieries Ltd [1948]; Re Saltdean Estate Co Ltd
[1968]
22 Re Chatterley-Whitfield Collieries Ltd [1948];

 the company’s coal-mining business had been nationalised and it

proposed to carry on operations on a reduced scale for which it
would need less capital. It therefore decided to reduce its capital by
paying off preference capital but keeping its ordinary shareholders.

 The court confirmed the reduction as fair because it was carried out
in accordance with the rights of the two classes of shareholders in a
winding up
23

 THANK YOU