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Flashcards in Legal Capital Deck (122):
1

Issuing shares at a premium

·         S610 –Requires any premium on a share to be paid into the share premium account. That’s part of legal capital. Only to be used when issuing bonus shares unless you are doing a reduction in capital.

2

o   BTI v sequana [ 2006]

  • Mrs Justice Rose - Not the same as the court confirmation. Court does not engage in the same procedure as it was in the old procedure. Its less than that, streamlined. 
  • Did they ask the requisite questions? (can the company pay its debts considering all liabilities?)
  • Did they act honestly? (not reasonable, no objective test).

 

3

  • 2nd EU Directive

    ·s582 - only can only issues shares for money or money’s worth. Not all consideration allowable.  Public company cannot issue shares in return for a promise to return services. At common law this is understandable because is promise is nothing. Promise is not consideration.

  •  

s582

4

Things you could do to reduce capital which are not issuing dividends?

 

 

·

Re Halt Garage Ltd [1982] 3 All ER 1016

  • Common law rule: cannot pay a fee to a director who has not done anything out of capital. 
  • Held to be void because it was a distribution out of capital.

Aveling Barford ltd v Perion Ltd [1989] BCLC 826

  • Cannot Sell something for less than it’s worth. Sale at under value.
  • Held to be void. A way of getting capital out and gives them a deliberate unlawful payment. 

Progress Property Company Ltd v Moorgarth Group Ltd [2010] UKSC 55

  • Lord Walker – Not all sales at undervalue are void.
  • 1st- Need realised cumlative profits.(830(2))
  • Have to look at motive/subjective intentions for transaction.
  • Substance and true purpose? Was it an improper attempt to get money out or was it bad bargain, a bad negotiation.
  • Is it an arms length transaction. Insider or unconnected to the company? If its unconnected, more likely to be valid. 

Global Corporate Ltd v Hale [2017] EWHC 2277 (Ch)

  • small company where director paid himself in dividends because accountant advised him to. However, there was no realised profits. 
  • Held: wasnt unlawful because didn’t break the dividend rule because when he took the dividends it was provisional. Couldn’t have known at that time whether there was enough money in the accounts. So he took them provisionally?
  • Had he broken the common law rule (like holt Garage case)?: no because he had earned the money, he was entitled.

 

 

 

5

Re Halt Garage Ltd [1982]

 

Q image thumb

·         Director was paid his fee out of capital. Company did not have any profits. Wasn’t in itself wrong because wasn’t a distribution. He hadn’t done anything. Performed no services or attended no meetings.

· Held: Unlawful gift out of capital. Rip off, getting money out of the company.

6

o   Re Vodaphone Group [2010]

  • Banks were supportive of the deal.
  • Projections were good.
  • If you actually are giving money back and reducing capital its more difficult for a creditor to object.

7

Art 6 - 2nd EU company law directive -2012/30/eu

s. 761/763

  • Public companies are now subject to minimum capital requirements. 25k legal capital.
  • 761/763- public companies need ‘alloted share capital of 50k’ to trade.
  • Not extended to private companies. – Private Companies can have £1 allotted capital.

8

Topham v Charles Topham Group Ltd [2003]

·         Bonus shares can be only out of profits.

9

FINANCING OF PURCHASE OF OWN SHARES

(1) Private companies: 

Out of capital in accordance with Chapter 5 

(1ZA) Private companies, if authorised by the articles:  

Out of capital otherwise than in accordance with Chapter 5, limits: 

-15,0000 or 

-5% of share capital 

(2) (a) (i): 

Out of distribu-table profits 

(2) (a) (ii): 

Out of the proceeds of a fresh issue of shares 

 

s692 

10

What does section 735 mean and the case that goes with it.

 

-          Section 735 - The Company is not liable in damages in respect of any failure on its part to redeem or purchase any of the shares. 

o   Barclays Bank plc v B & C Holdings [1995] BCC 1059 CA

  • literal interpretation

11

S642 procedure does not contain: (3)

  • No auditors report to back up directors statement
  • No publicity to alert creditors
  • No mechanism for creditors/shareholders to object.(only under 643(4))

12

o   Progress Property Company Ltd v Moorgarth Group Ltd [2010] UKSC 55

·  When will a sale be undervalue or alright.

· Lord Walker –

· look at substance of the transaction and try and find its true purpose, what was their intention. Did they intend to give money out?

· 1st- if you break dividend rules, that’s settled, that’s it. if you haven’t got realised profits and realised losses, then you are in trouble.

· Motive. What were their subjective intentions. 

- Is it an arms length transaction. Insider or unconnected to the company?

 

13

→s694  -

  • terms approved at company meeting
  • prior approval by ordinary res
  • vendor cannot vote to approve own contract.

Authority for purchase of off-market (private) purchase

14

o   Holders investment trust [1971]

Meggary – unfair against the preference shareholders. Delaying repayment for 19 years, 1 percent extra hardly making it up.

15

  • POWER OF COMPANY TO ISSUE REDEEMABLE SHARES

    (2) Private companies: No exclusion or restriction in the articles 

    (3) Public companies: Authorisation in the articles 

o   s684 - redeemable shares?

16

o   Park Bus International v Park [1992] BCLC 1034 Scots case

·   Issued shares in return to director’s services. – seen as good consideration in Scotland. At common law there is an enormous gap. Can only issue shares for money or moneys worth. Promise to do something was not consideration.

17

o   Trevor v Whitworth [1887]

Cannot issue redeemable shares.

Still basic rule s658

18

What’s important is cash flow. Can you pay your debts.

o   Royal Scottish Assurance plc [2011] CSOH 2

19

FINANCING OF REDEMPTION

(1) Private companies: 

  • Out of capital in accordance with Chapter 5 (701-723)

(2) (a) PLC/Private:

  •  Out of distributable profits 

(2) (b) PLC/ Private: 

  • Out of the proceeds of a fresh issue of shares 

 

s687 

20

  1. depreciating assets
  2. appreciating assets
  3. consecutive trade losses

Three problme areas of distributions

21

·         Director was paid his fee out of capital. Company did not have any profits. Wasn’t in itself wrong because wasn’t a distribution. He hadn’t done anything. Performed no services or attended no meetings.

· Held: Unlawful gift out of capital. Rip off, getting money out of the company.

Re Halt Garage Ltd [1982]

A image thumb
22

Ss 642-644

 

 

  • 642 - Private companies, nothing contrary to articles, special resolution and solvency statement.
    • 641 (1) 2 – this solvency statement procedure cannot be used if the only lasting members of the company hold redeemable shares

23

4 things you can do with profits

1. can distribute/dividends

2. Turn into capital

3. Revenue reserve -sit on it.

4. Bonus shares (script dividend). –

24

Trevor v Whitworth {1887]

Company bought back its own shares. 

25

You only need 2 things –

  1. Solvency statement –
    1. s642(1) a - Must be made no more than 15 days before the meeting
    2. ­s642(1) b - Must be registered
    3. S643 (1) a - Must be signed by all directors, not just some (s643) and anyone who won’t sign it has to resign as director. The statement says 2 things:
      1. Balance sheet Solvency – as things stand the company is able to pay its debts.
      2. Cash flow solvent – No reason they can think of why company will not be able to pay its debts for the next 12 months. 
  2. Special Resolution (641(1) a)

Section 642 - 643 prcoedure - solvency

26

Sections/process for Financing the Buyback/redemption

s709 

  • POWER TO REDEEEM OR PURCHASE OWN SHARES OUT OF CAPITAL 
  • (1) No restriction or prohibition in the articles 

s710 

  • PERMISSIBLE CAPITAL PAYMENT 

s713 

  • REQUIREMENTS FOR PAYMENT OUT OF CAPITAL: 

-s714 Directors’ statement + auditors’ report 

-s716 Approval by special resolution 

-s719 Public notice of proposed payment 

-s720 Directors’ statement + auditors’ report  to be available for inspection 

s721 

  • MEMBERS/CREDITORS MAY APPLY TO COURT TO CANCEL RESOLUTION 

27

Case law for Mistake in procedure in redeemption or buy back?

o   Dickinson v NAL Realisations (Staffordshire) Ltd [2017] EWHC 28 (Ch) - 

o   Western Ringblast Holdings Ltd [1989] GWD 23-950

o   Kinlan v Crimmin [2007] BCC 106

- Court will not rectify honest mistake and enforce the contract. 

28

s692 meaning and procedure

FINANCING OF PURCHASE OF OWN SHARES

(1) Private companies: 

Out of capital in accordance with Chapter 5 

(1ZA) Private companies, if authorised by the articles:  

Out of capital otherwise than in accordance with Chapter 5, limits: 

-15,0000 or 

-5% of share capital 

(2) (a) (i): 

Out of distribu-table profits 

(2) (a) (ii): 

Out of the proceeds of a fresh issue of shares 

 

29

  • Sell something for less than it’s worth. Sale at under value.
  • Held to be void. A way of getting capital out. Selling it less than its worth to an insider, gives them a deliberate unlawful payment. Accountants have a real problem signing them off

o   Aveling Barford ltd v Perion Ltd [1989] BCLC 826

30

  • if company is over capitalised.
  • Nothing stops companies making a loss.

  • Any payment out of capital is void/ultra vires. Companies can’t make any payment out of their legal share capital. (1890s). But might be good because:

31

  • Case to create redeemable shares on the reduction of capital. Wide power easy to do.

o   Re Forth Wines, Petitioner [1991] BCC 638

32

·  Sequana cocked up the docs. Somebody was challenging the solvency statement. Wrongly made.

o   BTI v sequana [ 2006]

33

o   Bairstow v Queens Moat Houses plc [2000] 1 BCLC 549; [2001] 2 BCLC 531 (CA)

·         Unlawful payment. Determined both dividends and common law rule.

· You will be liable if you knew it was unlawful or they knew of the facts which made it unlawful or Must of known or ought to have known. All judged by reference to the accounts.

 

  Allied Carpets plc v Nethercott [2001] BCC 80

·         Directors Have to repay it in full. Directors are liable to repay all employees if they are in breach of less culminate realised loss

What about directors who authorised an unlawful dividend ?

34

o   Re Forth Wines, Petitioner [1991] BCC 638

  •  can create redeemable shares on the reduction of capital. Wide power easy to do.

35

o   s684 - redeemable shares?

  • POWER OF COMPANY TO ISSUE REDEEMABLE SHARES

    (2) Private companies: No exclusion or restriction in the articles 

    (3) Public companies: Authorisation in the articles 

36

Reduction of capital - Court procedure. What is authority with these facts?

  • Company was cash flow solvent.
  • Banks were supportive of the deal.
  • Projections were good.
  • If you actually are giving money back and reducing capital its more difficult for a creditor to object.

o   Re Vodaphone Group [2010]

37

o   Dickinson v NAL Realisations (Staffordshire) Ltd [2017] EWHC 28 (Ch) - 

o   Western Ringblast Holdings Ltd [1989] GWD 23-950

o   Kinlan v Crimmin [2007] BCC 106

- Court will not rectify honest mistake and enforce the contract. 

Mistake in procedure in redeemption or buy back?

38

o   Lee v Neuchatel Asphatle Co (1889) 41 Ch D

· COA: Shouldn’t take into account depreciation of asset. But expenses of business should be.

Depreciation of assets?

39

o   BTI v sequana [ 2006]

·  Sequana cocked up the docs. Somebody was challenging the solvency statement. Wrongly made.

40

Gardener v Iredale [1912] Ch 700

 

Payment for shares - can a service?

41

o   Ammonia Soda v Chamberlain [1918]

· Dividend could be made out of a year’s profits even though the company had made a loss the last few years which exceeded the company’s profits.

Second directive - 830(2) Culm realised profits test. 

Consecutive trade losses.

42

Payment for shares - can a service?

Gardener v Iredale [1912] Ch 700

 

43

1. can distribute/dividends

2. Turn into capital

3. Revenue reserve -sit on it.

4. Bonus shares (script dividend). –

4 things you can do with profits

44

3 elements make the company’s legal capital

Q image thumb

  • 1. Issued shares – nominal value of initial shares issued
  • 2. Share premium – increase in price of shares.
  • 3. Capital reserves – profit turned into capital.

45

  • S646 (1)b –
    • (a)creditors of the company with a viable debt (one which would be admissible in the winding up of a company)
    • (b) can show a real likelihood that the reductions means the company was unable to discharge his debt/claim
  • 648 - Must publish the reduction to the public. 

S.645 Procedure - What does the Court look at?

46

·         Bonus shares can be only out of profits.

Topham v Charles Topham Group Ltd [2003]

47

extra over the nominal value

Share premium account? 

48

 If you want to reduce capital because balance sheet is off from losing money. Need to prove evidence of loss.

o   Moorgate Mercantile Holdings [1980]

49

Share premium account? 

extra over the nominal value

50

Issuing shares at a discount

Ooregum Gold Mining Co v Roper [1892] AC 125

  • HOl : need atleast a £1. The company is ultra vires and void. Cannot issue shares at a discount. Can make the nominal value a penny.

S580 - Eu law directive - cannot issue shares at a discount.

51

Profits to come from some of the dividends. Some of the dividends were covered by some of the profits. But not all.

o   Re Marini Ltd [2004] BCC 172

· No, just have to repay the bit that’s unlawful.

52

Consecutive trade losses.

Q image thumb

o   Ammonia Soda v Chamberlain [1918]

· Dividend could be made out of a year’s profits even though the company had made a loss the last few years which exceeded the company’s profits.

 

Second directive - 830(2) Culm realised profits test. 

53

  • sets out two ways a company can reduce capital
    • Ss 642-644 – Private companies, nothing contrary to articles, special resolution and solvency statement
      • 641 (1) 2 – solvency statement procedure cannot be used if the only lasting members of the company hold redeemable shares 
    • Ss645-651 - public/private - special resolution confirmed by the court.
    • 641(6) - unless there is anything contrary in the articles.

S641(1)

54

Cannot issue redeemable shares.

Still basic rule s658

o   Trevor v Whitworth [1887]

55

 s690-694? 

Purchase of own shares

s690 

POWER OF COMPANY TO PURCHASE OWN SHARES

(1) (b): No restriction or prohibition in the articles 

56

Assets appreciating

o   Lubbock v British Bank of SA [1892] 2 Ch 198

  • if you realise the profit then you can distribute it.
  • hints that you can distribute without even realising (just rewrite the balance sheet)

2nd directive - have to realise ( s830(2))

57

Challenging the statutory procedure for reduction

S634(4) - if directors dont have reasonable grounds for opinions expressed in solvency statement - criminally liable. 

58

s582

  • 2nd EU Directive

    ·s582 - only can only issues shares for money or money’s worth. Not all consideration allowable.  Public company cannot issue shares in return for a promise to return services. At common law this is understandable because is promise is nothing. Promise is not consideration.

  •  

59

 

-          Section 735 - The Company is not liable in damages in respect of any failure on its part to redeem or purchase any of the shares. 

o   Barclays Bank plc v B & C Holdings [1995] BCC 1059 CA

  • literal interpretation

What does section 735 mean and the case that goes with it.

60

o   Lubbock v British Bank of SA [1892] 2 Ch 198

  • if you realise the profit then you can distribute it.
  • hints that you can distribute without even realising (just rewrite the balance sheet)

2nd directive - have to realise ( s830(2))

Assets appreciating

61

o   Re Marini Ltd [2004] BCC 172

· No, just have to repay the bit that’s unlawful.

Profits to come from some of the dividends. Some of the dividends were covered by some of the profits. But not all.

62

o   Gardener v Iredale [1912] Ch 700

 

Q image thumb

  • company and shareholder can have two separate contracts and agree to do a service for consideration. cancel themselves out. 

63

  1. guaranteed exit
  2. debt/equity manipulation - reduce capital
  3. employee buyback scheme
  4. flexibility - treasury shares

Pros for company buybacks and redemption

64

o   Re Wragg [1897] 1 Ch 796

Courts will not enquire into the consideration for shares. Unless there is no consideration and past consideration is not adequate. Can’t pass directors shares for their duties. Except in Scotland.

65

  • 642 - Private companies, nothing contrary to articles, special resolution and solvency statement.
    • 641 (1) 2 – this solvency statement procedure cannot be used if the only lasting members of the company hold redeemable shares

Ss 642-644

 

 

66

What about directors who authorised an unlawful dividend ?

o   Bairstow v Queens Moat Houses plc [2000] 1 BCLC 549; [2001] 2 BCLC 531 (CA)

·         Unlawful payment. Determined both dividends and common law rule.

· You will be liable if you knew it was unlawful or they knew of the facts which made it unlawful or Must of known or ought to have known. All judged by reference to the accounts.

 

  Allied Carpets plc v Nethercott [2001] BCC 80

·         Directors Have to repay it in full. Directors are liable to repay all employees if they are in breach of less culminate realised loss

67

· Company had Ordinary shares and preference shares.

5% preference shares and they were redeemable.

Majority of the preference shareholders were also ordinary shareholders.

They proposed a reduction of capital to get rid of preference shares and replace them with IOU’s (bonds).

Paying 6% but postponed repayment from 1971 – 1990. 

Reason was As ordinary shareholders it benefitted them.

Minority preference shareholders objected.

o   Holders investment trust [1971]

68

o   Global Corporate Ltd v Hale [2017] EWHC 2277 (Ch)

·  Small company, full time director’s company. he paid himself in dividends rather than salary it is better for tax purposes.  Problem was there were no sufficient realised profits. Companies in trouble asking him to repay dividends.

· Held: No because didn’t break the dividend rule because when he took the dividends it was provisional. Couldn’t have known at that time whether there was enough money in the accounts. So he took them provisionally?

·

69

Purchasing shares with assets rather than cash.(second route)

  • At common law: no doesn’t need nominal value.
  • can be any consideration

70

·   Issued shares in return to director’s services. – seen as good consideration in Scotland. At common law there is an enormous gap. Can only issue shares for money or moneys worth. Promise to do something was not consideration.

o   Park Bus International v Park [1992] BCLC 1034 Scots case

71

Depreciation of assets?

o   Lee v Neuchatel Asphatle Co (1889) 41 Ch D

· COA: Shouldn’t take into account depreciation of asset. But expenses of business should be.

72

o   Moxham v Grant [1900] 1 QB 88

·         Recipient from a capital at company.

· Common law liability for breach of common law rule : You would be liable to repay if you knew or ought to have known. Constructive notice. (Aveling Barford)

 

o   It’s A Wrap Ltd v Gula [2006] BCC 626

·         Dividend rule s 847 – you will be liable if you know or have reasonable grounds to believe.

· HC: Judge took the view not only had the facts but know or believe it was unlawful. Knew you were breaking the law.  On the facts, defendant didn’t know he was breaking the law. 

· COA – Unanimously said you knew or had reasonable grounds to believe the facts. So they were liable.

· COA Disagreed with what they meant by reasonable grounds.

·         Arden – ought to have known the facts. Constructive notice. Objective. Reasonable person.

·         Chadwick – actual notice. deliberately not knowing. Nelsonian

What happens when unlawful distributions are paid?

73

Three problme areas of distributions

  1. depreciating assets
  2. appreciating assets
  3. consecutive trade losses

74

· Held: this is only a hypothetical debt. Have to have a viable debt. Realistic debt and not a possible debt.

  3(+1) factors

1. Not speculative. facts known now.  

2. Temporal factor. Further away maturity, less likely to be significant.

3. BoP is on the creditor. More than a possibility that you won’t get paid, but less than a probability.  A real likelihood?

 

4. What’s important is cash flow.

Re Liberty International plc [2010] 2 BCLC 665

75

s693 

AUTHORITY FOR PURCHASE OF OWN SHARES

  (1) a - OFF-MARKET PURCHASE 

→s694 

  1. b - MARKET PURCHASE 

→s701 

76

  • S.645.

  • S.645.- Allows a company to reduce its capital provided
    • 1)authority In Articles
    • 2) Special resolution authorising it.
    • 3) Court confirmation.

77

Pros for company buybacks and redemption

  1. guaranteed exit
  2. debt/equity manipulation - reduce capital
  3. employee buyback scheme
  4. flexibility - treasury shares

78

S634(4) - if directors dont have reasonable grounds for opinions expressed in solvency statement - criminally liable. 

Challenging the statutory procedure for reduction

79

  • Argument was there might be a shortfall in the company’s pension fund.
  • Might be underfunded and the pensions regulating might ask to put more money in.

o   Re Liberty International plc [2010] 2 BCLC 665

80

  • company and shareholder can have two separate contracts and agree to do a service for consideration. cancel themselves out. 

o   Gardener v Iredale [1912] Ch 700

81

Section 642 - 643 prcoedure - solvency

You only need 2 things –

  1. Solvency statement –
    1. s642(1) a - Must be made no more than 15 days before the meeting
    2. ­s642(1) b - Must be registered
    3. S643 (1) a - Must be signed by all directors, not just some (s643) and anyone who won’t sign it has to resign as director. The statement says 2 things:
      1. Balance sheet Solvency – as things stand the company is able to pay its debts.
      2. Cash flow solvent – No reason they can think of why company will not be able to pay its debts for the next 12 months. 
  2. Special Resolution (641(1) a)

82

what happens if you break the common law rule of distributing capital illegally?

·  Recipient from a capital at company.

· Held: Common law liability for breach of common law rule : You would be liable to repay if you knew or ought to have known. Constructive notice. (Aveling Barford)

83

o   Moorgate Mercantile Holdings [1980]

 If you want to reduce capital because balance sheet is off from losing money. Need to prove evidence of loss.

84

 

  • Trevor v Whitworth [1887] 12 App Cas 409
  • Cannot buy back shares because returning capital to the members. Nor can you issue redeemable shares.

  • 658 states this. Can’t issue redeemable shares and issue share buy backs. Since 1981 could do both.

Purchase & redemption - basic rule

85

Purchase & redemption - basic rule

 

  • Trevor v Whitworth [1887] 12 App Cas 409
  • Cannot buy back shares because returning capital to the members. Nor can you issue redeemable shares.

  • 658 states this. Can’t issue redeemable shares and issue share buy backs. Since 1981 could do both.

86

  • public/private - Authority in articles(public), special resolution confirmed by the court.

Section 645-651

87

Power to issue redeemable shares

o   658

  • Company cannot purchase back its own shares except for limited circumstances in redemption (684- 689) and purchase under (690- 737)

88

 s684 - 688

s684 

POWER OF COMPANY TO ISSUE REDEEMABLE SHARES

(2) Private companies: No exclusion or restriction in the articles 

(3) Public companies: Authorisation in the articles 

89

Ooregum Gold Mining Co v Roper [1892] AC 125

  • HOl : need atleast a £1. The company is ultra vires and void. Cannot issue shares at a discount. Can make the nominal value a penny.

S580 - Eu law directive - cannot issue shares at a discount.

Issuing shares at a discount

90

What happens when unlawful distributions are paid?

o   Moxham v Grant [1900] 1 QB 88

·         Recipient from a capital at company.

· Common law liability for breach of common law rule : You would be liable to repay if you knew or ought to have known. Constructive notice. (Aveling Barford)

 

o   It’s A Wrap Ltd v Gula [2006] BCC 626

·         Dividend rule s 847 – you will be liable if you know or have reasonable grounds to believe.

· HC: Judge took the view not only had the facts but know or believe it was unlawful. Knew you were breaking the law.  On the facts, defendant didn’t know he was breaking the law. 

· COA – Unanimously said you knew or had reasonable grounds to believe the facts. So they were liable.

· COA Disagreed with what they meant by reasonable grounds.

·         Arden – ought to have known the facts. Constructive notice. Objective. Reasonable person.

·         Chadwick – actual notice. deliberately not knowing. Nelsonian

91

  • Mrs Justice Rose - Not the same as the court confirmation. Court does not engage in the same procedure as it was in the old procedure. Its less than that, streamlined. 
  • Did they ask the requisite questions? (can the company pay its debts considering all liabilities?)
  • Did they act honestly? (not reasonable, no objective test).

 

o   BTI v sequana [ 2006]

92

  • Any payment out of capital is void/ultra vires. Companies can’t make any payment out of their legal share capital. (1890s). But might be good because:

  • if company is over capitalised.
  • Nothing stops companies making a loss.

93

  • No auditors report to back up directors statement
  • No publicity to alert creditors
  • No mechanism for creditors/shareholders to object.(only under 643(4))

S642 procedure does not contain: (3)

94

s684 

POWER OF COMPANY TO ISSUE REDEEMABLE SHARES

(2) Private companies: No exclusion or restriction in the articles 

(3) Public companies: Authorisation in the articles 

 s684 - 688

95

o   Re Vodaphone Group [2010]

  • used three factors
  • plus cash flow.

96

s. 761/763

  • Public companies are now subject to minimum capital requirements. 25k legal capital.
  • 761/763- public companies need ‘alloted share capital of 50k’ to trade.
  • Not extended to private companies. – Private Companies can have £1 allotted capital.

Art 6 - 2nd EU company law directive -2012/30/eu

97

  • used three factors
  • plus cash flow.

o   Re Vodaphone Group [2010]

98

AUTHORITY FOR PURCHASE OF OWN SHARES

  (1) a - OFF-MARKET PURCHASE 

→s694 

  1. b - MARKET PURCHASE 

→s701 

s693 

99

Section 645-651

  • public/private - Authority in articles(public), special resolution confirmed by the court.

100

·  Recipient from a capital at company.

· Held: Common law liability for breach of common law rule : You would be liable to repay if you knew or ought to have known. Constructive notice. (Aveling Barford)

what happens if you break the common law rule of distributing capital illegally?

101

Purchase of own shares

s690 

POWER OF COMPANY TO PURCHASE OWN SHARES

(1) (b): No restriction or prohibition in the articles 

 s690-694? 

102

s687 

FINANCING OF REDEMPTION

(1) Private companies: 

  • Out of capital in accordance with Chapter 5 

(2) (a) PLC/Private:

  •  Out of distributable profits 

(2) (b) PLC/ Private: 

  • Out of the proceeds of a fresh issue of shares 

 

103

Authority for purchase of off-market (private) purchase

→s694  -

  • terms approved at company meeting
  • prior approval by ordinary res
  • vendor cannot vote to approve own contract.

104

  • At common law: no doesn’t need nominal value.
  • can be any consideration

Purchasing shares with assets rather than cash.(second route)

105

·  When will a sale be undervalue or alright.

· Lord Walker –

· look at substance of the transaction and try and find its true purpose, what was their intention. Did they intend to give money out?

· 1st- if you break dividend rules, that’s settled, that’s it. if you haven’t got realised profits and realised losses, then you are in trouble.

· Motive. What were their subjective intentions. 

- Is it an arms length transaction. Insider or unconnected to the company?

 

o   Progress Property Company Ltd v Moorgarth Group Ltd [2010] UKSC 55

106

Meggary – unfair against the preference shareholders. Delaying repayment for 19 years, 1 percent extra hardly making it up.

o   Holders investment trust [1971]

107

o   Royal Scottish Assurance plc [2011] CSOH 2

What’s important is cash flow. Can you pay your debts.

108

o   Holders investment trust [1971]

· Company had Ordinary shares and preference shares.

5% preference shares and they were redeemable.

Majority of the preference shareholders were also ordinary shareholders.

They proposed a reduction of capital to get rid of preference shares and replace them with IOU’s (bonds).

Paying 6% but postponed repayment from 1971 – 1990. 

Reason was As ordinary shareholders it benefitted them.

Minority preference shareholders objected.

109

unless there is anything contrary in the articles.

 s 641(6)

110

 s 641(6)

unless there is anything contrary in the articles.

111

S.645 Procedure - What does the Court look at?

  • S646 (1)b –
    • (a)creditors of the company with a viable debt (one which would be admissible in the winding up of a company)
    • (b) can show a real likelihood that the reductions means the company was unable to discharge his debt/claim
  • 648 - Must publish the reduction to the public. 

112

S641(1)

  • sets out two ways a company can reduce capital
    • Ss 642-644 – Private companies, nothing contrary to articles, special resolution and solvency statement
      • 641 (1) 2 – solvency statement procedure cannot be used if the only lasting members of the company hold redeemable shares 
    • Ss645-651 - public/private - special resolution confirmed by the court.
    • 641(6) - unless there is anything contrary in the articles.

113

  • S.645.- Allows a company to reduce its capital provided
    • 1)authority In Articles
    • 2) Special resolution authorising it.
    • 3) Court confirmation.

  • S.645.

114

Company bought back its own shares. 

Trevor v Whitworth {1887]

115

·         S610 –Requires any premium on a share to be paid into the share premium account. That’s part of legal capital. Only to be used when issuing bonus shares unless you are doing a reduction in capital.

Issuing shares at a premium

116

Courts will not enquire into the consideration for shares. Unless there is no consideration and past consideration is not adequate. Can’t pass directors shares for their duties. Except in Scotland.

o   Re Wragg [1897] 1 Ch 796

117

  • 1. Issued shares – nominal value of initial shares issued
  • 2. Share premium – increase in price of shares.
  • 3. Capital reserves – profit turned into capital.

3 elements make the company’s legal capital

A image thumb
118

o   Re Liberty International plc [2010] 2 BCLC 665

  • Argument was there might be a shortfall in the company’s pension fund.
  • Might be underfunded and the pensions regulating might ask to put more money in.

119

o   658

  • Company cannot purchase back its own shares except for limited circumstances in redemption (684- 689) and purchase under (690- 737)

Power to issue redeemable shares

120

s709 

POWER TO REDEEEM OR PURCHASE OWN SHARES OUT OF CAPITAL 

(1) No restriction or prohibition in the articles 

 

s710 

PERMISSIBLE CAPITAL PAYMENT 

 

s713 

REQUIREMENTS FOR PAYMENT OUT OF CAPITAL: 

-s714 Directors’ statement + auditors’ report 

-s716 Approval by special resolution 

-s719 Public notice of proposed payment 

-s720 Directors’ statement + auditors’ report  to be available for inspection 

s721 

MEMBERS/CREDITORS MAY APPLY TO COURT TO CANCEL RESOLUTION 

Sections/process for Financing the Buyback/redemption

121

o   Aveling Barford ltd v Perion Ltd [1989] BCLC 826

  • Sell something for less than it’s worth. Sale at under value.
  • Held to be void. A way of getting capital out. Selling it less than its worth to an insider, gives them a deliberate unlawful payment. Accountants have a real problem signing them off

122

Re Liberty International plc [2010] 2 BCLC 665

· Held: this is only a hypothetical debt. Have to have a viable debt. Realistic debt and not a possible debt.

  3(+1) factors

1. Not speculative. facts known now.  

2. Temporal factor. Further away maturity, less likely to be significant.

3. BoP is on the creditor. More than a possibility that you won’t get paid, but less than a probability.  A real likelihood?

 

4. What’s important is cash flow.