With the existence of new company shares comes the issuance of them and the required payment from the incorporated members of the company. What happens, however, if the called-up share capital is not paid?
When are shares paid for by company members?
When shares are issued to company members, the payment for those shares normally happens immediately upon issuance or transferral. This is not cast in stone though. The directors of a company might agree that, in their particular circumstances, they will resolve that the company permits the shareholders to process a partial payment, multiple partial payments or delay the payment in full to a future specified time.
The timing of payment should be specified in the articles of association drawn up when setting up the company. It should also be specified in the company’s shareholders’ agreement. The parameters, expectations and timing details that the directors agree to in the articles of association and shareholders agreement usually strictly govern when shareholders must execute payment for company shares. Examples of common milestones at which a payment is required are:
When the company is being set up and incorporated
Immediately after the issuance of the shares when incorporating
Immediately after the transfer of the shares when incorporating
At a specific calendar date in the future
Within a certain time period, e.g. within twelve months or sixty months
At the time of share call, i.e. should a company’s financial situation require an influx of capital; rather than taking out a costly loan, the board of directors might call for all outstanding monies owed on shares to be paid immediately
When dissolving the company
Note: Most new businesses use the HMRC model articles for private companies when going through the incorporation process. It is important to note that the provisions therein stipulate that, aside from the issuance of shares at the time of incorporation, any additional issuance of shares requires immediate, full payment.
The usual way to pay for shares in a company is to use a cash deposit or transfer directly into the specified bank account of the company. Yet, this is not the only option available for shareholders (a.k.a. Company members). You can also negotiate a ‘non-cash consideration for shares’ option.
What are non-cash considerations?
Non-cash consideration means exchanging something that is not cash that, in its execution or transfer, is deemed to meet the value of the shares. It would be prudent to have a very clear contract written up to describe the parties’ expectations of the services, especially where services are being ‘bartered’. It must be very clear when that consideration has been met and the shares are fully ‘paid’ for.
Examples of non-cash considerations can encompass:
Services (such as building, gardening, use of a yacht)
Physical property (professionally evaluated)
Assets, e.g. artworks, software, electronic equipment
The transfer of shares from another incorporated business
Goodwill (the purchase price of a business minus the value of its assets and liabilities)
Intellectual property
The settling of debt, i.e. shares to the debt value
When does a shareholder not have to pay for their shares?
There are not many occasions when a shareholder is not required to pay for the selection of shares they have been issued with. These are:
Employers allocating shares to staff as part of an incentive scheme
A special performance bonus issuance
Gifting shares to another person (with no outstanding amounts on them)
Inheriting shares from a person (with no outstanding amounts on them)
Note: It is important to talk to an accountant about the tax ramifications of the above four occurrences for the business and the person receiving the shares.
Having said all of the above, there could be a scenario whereby regular shareholders are not required to pay for their shares. Suppose the model articles of association are written to exclude the requirement for instant payment upon issuance, and no director issues a call to settle share debts. In that case, the shareholders do not need to pay.
Now that we have discussed the payment of amounts for shares, it is important to understand why you are being asked to pay a specific amount per share. Here is an explanation of what the nominal value of a share is versus its market value.
What does ‘nominal value’ mean?
Section 580 of the Companies Act 2006 restricts a business’s ability to allocate shares to shareholders at a zero or negative value. The Act requires all shares to have a “nominal value”, and you could call this their lowest value possible.
No member may purchase shares for a value that is less than the nominal value.
The Companies Act sets the minimum share price level to be GBP0.01, but your company can set their preferred nominal value. Generally, startups register their shares at a nominal value of GBP1, but you can also nominate any value such as GBP100. In addition, it does not have to be in GBP; it can be a foreign currency.
Once the directors have nominated the share’s nominal value, all shares thereafter are issued at that nominal value, not varying values. In addition, once the currency is chosen, the shares must be issued in that currency, not multiple currencies. There can be differences between classes of shares but not within one class.
That nominal value has another role to play.
The scope of a company member’s liability (their responsibility) in relation to the company arrears is limited by the total minimum value of their shares. That is a significant risk limitation.
This is why certain companies with shares are called limited liability companies – the directors have their responsibilities and risk limited. It is a valuable advantage versus the full-blown risk of a sole trader business.
Note: There are also unlimited liability companies. Be sure which company you have shares in, as the directors of an unlimited company will have a different risk profile.
What does ‘market value’ mean?
In addition to the above described nominal values, shares simultaneously have another value called the market value. In theory, both values could be the same at the point of starting up. However, the market value will hopefully grow and continue to climb, and thus create a differential between the nominal and market values. This gap is called the premium amount.
Hopefully, your share premiums soar!
And if your shares do soar, then the next time that shares are given to new or existing shareholders, they must be revalued after the initial establishment of the company. This also applies if a company member has a buyer for the shares in their portfolio.
For shares reevaluation, the actual company needs to be evaluated. This will then inform the shares’ market value, meaning that the share price paid for will be the nominal value, plus the share premium, which is the market value.
Can unpaid or partly-paid shares be a problem?
The term ‘unpaid shares’ is used when a shareholder is issued with their allotted shares without transferring the requisite funds to cover the nominal value plus the premium value to the company bank account.
The term ‘partly paid shares’ is used when the shareholder transfers funds for part of the total amount due for the amount mentioned above.
HMRC legislation states that shareholders who have been issued with their allotted shares but have not transferred the requisite amount for the same are fully liable and responsible to the company for that debt. In addition, those shareholders are required to act in accordance with the law in the company’s decisions and management. Their legal responsibility is not reduced by the lack or partial payment of the full value of the shares.
Note: Remember that some Articles of Association may not allow a business to sell shares unless they are fully paid for upfront. A model association document, available on the HMRC website, allows for the initial issuing of shares to founders to be unpaid for but not subsequent issuances.
What is a call on shares and a forfeiture notice?
HMRC describes a call on shares as follows (shortened):
“The directors may from time to time make calls upon the members…[for funds]…unpaid on their shares (whether on account of the nominal value of the shares or by way of premium) and not by the conditions of allotment…provided that no call shall exceed one-fourth of the nominal value of the share or be payable at less than one month from the date fixed for the payment of the last preceding call, and each member shall (subject to receiving at least fourteen days’ notice specifying the time or times and place of payment) pay to the company…the amount called on his shares. A call may be revoked or postponed as the directors may determine.”
The directors may request payment on any outstanding amounts on shares, but the amount requested may not be more than twenty-five percent of the nominal value of the shares. Payments may not be requested to be more frequent than monthly. In addition, the shareholder must be given a minimum of two weeks’ notice containing the full details. That act of sending out the notice is a ‘call on shares’.
HMRC further clarifies that directors may, at the time of issuing shares, agree in writing with the shareholder what the amounts will be for call notices. These amounts can then be greater than twenty-five percent of the nominal value.
To produce a call on shares requires:
Company directors to refer to the Articles of Association of the business
A board meeting to be called
A resolution to be passed
When receipt of payment is received, against a call on shares, the following steps must occur:
The Company Secretary must:
Issue a new share certificate
Update the Register of Members
Submit a new Confirmation of Statement to Companies House within a month
Report all other share structure changes within twenty-one days.
If the deadline date for the receipt of payment is missed, it is necessary to issue a reminder of call on shares to the shareholder with a new deadline date.
Should this second receipt date be missed, a ‘forfeiture notice’ should be issued to the shareholders.
A predefined interest rate is then calculated on the outstanding amount until receipt of payment ends the compounding interest. The HMRC website refers to a five percent interest rate.
Should payment still not be forthcoming then the shareholder, within a predefined period, loses their rights to their shareholdings.
Do company members with unpaid or partly-paid shares have fewer rights?
Unless a forfeiture occurs, the fact that shares have, in agreement, not been fully paid for does not reduce the rights of a company member.
Shares have different share classes and the rights pursuant to those classes are fully available to each holder of shares as long as they have not transgressed with a forfeiture. Examples of rights are:
The right to vote
The right to receive dividend payments when the company resolves to issue such payments
The right to distribute shares
The right to sell their shares, subject to:
The Articles of Association
The shareholders’ agreement
The acceptance of the outstanding debt by the incoming shareholder
A J10 stock transfer form is to be submitted in this specific instance
Is it a standard business practice to allow delayed payments?
Short answer – yes. Companies use this option to be more flexible with incoming shareholders. The reasons for a delayed payment could include, but not be limited to, the following:
A company bank account has simply not been set up yet
Incoming shareholders might not have capital available immediately but they sign an agreement for payment deadlines
An incoming shareholder can agree to a predefined schedule of payments
It gives the company power to issue a forfeiture in future
The responsibilities of company directors
Shareholders must be mindful of the legal responsibilities that come with having shares in a company. However, being a shareholder is not equal to being a director. Some decisions are required by directors, board meetings and resolutions, and sometimes directors have to get permission from shareholders via shareholder meetings.
A company director has vastly more legally-bound responsibilities that include, but are not limited to:
Notifying the company of any conflicts of interest
Use their role for the benefit and not the detriment of the company
Act with care and be knowingly competent pursuant to the role of director
Comply with company Acts
Not trading recklessly or causing an insolvency
Revealing material information
Ensure company records are up to date and accurate
Conclusion
Companies can, subject to the Articles of Association, issue shares to shareholders with an agreement to receive payment partially or not at all until a future date. Remember that the HMRC model Articles of Association only allow this for the initial issuing of shares, so companies have to have those articles amended to incorporate deviations from this.
With the existence of new company shares comes the issuance of them and the required payment from the incorporated members of the company. What happens, however, if the called-up share capital is not paid?
