What Happens If Called Up Share Capital Is Not Paid?
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)
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):