Company Formation With Paid, Unpaid or Partly Paid Shares

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A company is formed when its founders (or founder) state in a document called a Memorandum of Association that they wish to form a company under the Companies Act 2006 and have agreed to become members of the company and buy at least one share each.

When shares are issued on the incorporation (formation) of a company, they are usually issued as ones for which payment is required. Shares are allotted a nominal value, and that is the amount the company must receive for each of the shares it issues. So, a company issuing 100 shares with a nominal value of £1 will receive £100.

Share issues

Shares serve three functions:

  • They indicate ownership (or partial ownership) of a company;
  • They are a means to raise capital for a business;
  • They give the shareholders votes by which they exercise collective control over the running of a company.

In many cases, newly formed companies do not require capital. The purpose of some companies may simply be to hold investments and assets, exploit intellectual copyright, provide limited liability, reduce tax or provide the services of the owner on a contractual basis. These activities do not require any capital, and shares are only issued to give the company owners limited liability and a means of controlling the company. When there are no capital requirements, companies tend to be formed with a minimum amount of paid-up capital, such as one fully paid-up share of £1.

“Not yet paid for” and unpaid shares

One source of confusion in terms of share capital is the distinction between unpaid shares and shares that are not yet paid for. When a company is being incorporated, it does not have a bank account; so, it has no means to receive payment for its shares. However, the accounting records of a newly formed company that issues, for example, 100 fully paid shares of £1, would reflect a fully paid up share capital of £100 along with £100 due from the shareholders because the company has not yet received the payment. In the case of most small companies, the £100 that is due to the company for shares is never specifically settled and remains on the balance sheet or is set off against loans from the director/shareholders. This is perfectly acceptable as long as the company is solvent, and the shares will be shown as fully paid up.

Nominal value

Shares are given a nominal value when they are issued, and it can be any figure the founding members or directors consider suitable. Thus, a share can be 1p, 10p, £1, £10 or any other figure. Furthermore, there is no obligation to issue it in a sterling denomination; they can be issued in other currencies as well. Once the nominal value has been set, the shares have to be classified as unpaid, partly paid or payable in full. S580 of the Companies Act 2006 states that a company cannot issue shares at a discount. A majority of companies are incorporated with shares that are issued as fully paid ones. If the capital requirements of a company are minimal or can be satisfied with a loan capital, it is usual to start the company with a minimal but fully paid up share capital. However, if it intends to have a substantial capital but wants to avoid the shareholders having to pay for their shares until some future event, then issuing the shares as nil paid or partly paid may be the solution.

Payment of shares

Section 583 of the Companies Act 2006 states that shares have to be paid for by a consideration (payment) of cash. The act goes on to define a consideration as follows:

  • A cheque received by the company in good faith and one that the directors have no reason to suspect non-payment of;
  • A release of a liability of the company for a liquidated sum;
  • An undertaking to pay cash to the company at a future date;
  • Payment by any other means that gives rise to a present or future entitlement to a payment, or a credit equivalent to payment, in cash.

The act is flexible enough to allow for almost any type of transaction, but shares are usually paid by bank transfer, if they are paid at all.

Significance of unpaid shares to the shareholder

The article will state the conditions that will trigger a request to the shareholders to pay any unpaid element of the shares they hold. A request for payment is known as “making a call”. The shareholders may not receive much warning before they are asked to make a payment. Moreover, there are consequences for investors who hold shares that are unpaid or partly paid:

  • If a company is insolvent and goes into liquidation, the liquidator can insist that payment in full is made for the shares an investor holds. This will be at a time when the business – and consequently, the shares – may be worthless.
  • Transferring shares to a third-party buyer becomes more difficult if the shares carry a potential liability.
  • Most Articles of Association include a condition that failure to meet a call could result in forfeiture of shares, interest charges and the loss of voting rights.

Companies with minimal capital requirements during formation can always issue more shares as they expand, and there is little necessity for unpaid or partly paid shares.

Why are unpaid or partly paid shares issued?

Issuing partly paid or unpaid shares give a company some flexibility in its dealings with the investors, staff and other potential stakeholders. The following are examples of some uses of unpaid or partly paid shares:

  • To assist an investor or business partner who is unable to pay immediately but agrees to pay at a later date in accordance with a timetable;
  • To facilitate an investor or investors who may insist that the payment is dependent upon the company achieving some set targets and will commit to making the full investment until those targets are achieved;
  • To reward the staff and management with a bonus issue of shares for which they do not have to pay. Bonus shares have long been used to help align the interests of the staff and management with those of the company for which they work;
  • To facilitate tax planning in family-owned companies

Are the rights of the holders of partly paid or unpaid shares affected in any way?

The rights of all the shareholders are specified in the Articles of Association and can be varied by a majority of those shareholders. However, unless the article states otherwise, the rights of the holders of unpaid or partly paid shares will not vary in terms of the following:

  • They will be entitled to vote on resolutions;
  • They will be able to receive dividends;
  • They will be able to trade their shares with willing buyers.

Transfer of unpaid or partly paid shares

Shares are normally transferred using a stock transfer form called a J30. If the shares are partly paid or unpaid, a J10 stock transfer form should be used. These forms are freely available on the internet.

When are unpaid or partly paid shares issued?

  • On incorporation, one will require a non-standard or modified model of the Articles of Association. We offer a service on this page that automatically modifies the Articles of Association for anyone wishing to issue partly paid or unpaid shares.
  • Following incorporation, a company can pass a resolution to modify the Articles of Association and allow the company to issue partly paid or unpaid shares.

What are the disclosure requirements regarding partly paid or unpaid shares?

  • The unpaid amount for each share class must be shown on the share certificates and the company’s statutory register of members.
  • The unpaid amount for each share class must be shown on the statement of capital, which should be completed and submitted to Companies House each time there is an allotment of shares or upon incorporation or other changes to the value of a company’s issued share capital.
  • The unpaid amount has to be shown in the balance sheet and contrasted with any fully paid shares the company may also have issued.
  • Each class of shares must be identified in the annual confirmation statement filed with Companies House.

Whenever you consider issuing unpaid or partly paid shares, get advice about the tax implications. You should also obtain advice if you are considering taking or transferring shares that are not fully paid for. The consequences of getting it wrong can be serious.

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