Chapter 19

Question 1

What do shareholders receive and what do debenture holders receive?

Answer 1

Shareholders receive dividends

Debenture holder receive Interest

Question 2

What is a share?

Answer 2

An interest of a shareholder in a company measured by a sum of money

Question 3

Can a company issue its shares at a discount below nominal value?

Answer 3

No!

Question 4

What is uncalled share capital?

Answer 4

The amount of issues shares capital that shareholders have not yet been called upon by the company to pay

Question 5

What do we mean by called up share capital?

Answer 5

A company may “call” for any unpaid share capital to be paid in whole or in part

Question 6

What is unissued share capital?

Answer 6

Share capital that has been promised by the company to no-one

Question 7

What are ordinary shares?

Answer 7

Standard shares that usually offer 1 vote per share & are entitled to a dividend from distributable profits

Can be divided into different classes of shares

Question 8

What are preference shares?

Answer 8

Shares that grant the shareholder some form of preference or additional benefit over holders of ordinary shares

Nature of preference describe in constitution

Get priority over ordinary shares upon repayment

Usually get dividend at fixed rate

Question 9

What are deferred shares?

Answer 9

Shares that are issues on the basis that the rights attaching to them will take effect only at a later date or on the happening of a future event

Question 10

What are convertible shares?

Answer 10

Shares that, at the time of issue, carry the right at a future time to be changed into another type of share

Question 11

What are redeemable shares?

Answer 11

Shares that are issues with a provision that they may be bought back by the company at a later date

Question 12

What is the allotment of a share?

Answer 12

The process of getting the shares into the ownership of a shareholder

Question 13

What happens when a person wishes to subscribe to shares?

Answer 13

• Person makes and offer to the company
• The company’s acceptance of the offer amounts to the “allotment” of the shares to the shareholders
• Then the completion of the contract when the shareholder’ name is entered into the company’s register of members

Question 14

When does the consolidation of share capital occur?

Answer 14

Where the nominal value of shares is low and the company converts them into shares with a higher nominal value

Question 15

When does the sub-division of share capital occur?

Answer 15

Where the nominal value of shares is high and the company converts them into shares with a lower nominal value

Question 16

What is meant by capital maintenance?

Answer 16

Also known as capital recovery

An accounting concept based on the principle that a company’s income should only be recognized after it has fully recovered its costs or its capital has been maintained

Question 17

What are a company’s distributable profits?

Answer 17

Accumulated realised profits less accumulated realised losses

Question 18

What are the 2 types of dividends payable?

Answer 18

Interim and final

Question 19

what are interim dividends?

Answer 19

Interim dividends can be declared if directors believe that there are insufficient distributable profits to justify their doing so.

Question 20

What are final dividends?

Answer 20

Dividends that are declared by resolution of the shareholder in general meeting

Question 21

How can a company reduce its share capital legally?

Answer 21

• Issue share capital provided the Articles allow it, the shareholders pass a special resolution and either court approval is obtain / a solvency statement supports the resolution
• Company can purchase owns shares - “Share buy-back”

Question 22

How can a buy-back of shares be funded?

Answer 22

• Out of distributable profits
• From proceeds of a fresh issue of shares
• With a de minimus amount of cash (larger of £15,000 or 5% of share capital)
• Out of capital

Private company can only use distributable profits

Question 23

Describe the procedure for a buy-back of shares

Answer 23

• Contract for the buy-back must be approved by members by ordinary resolution
• Contract must be available at company’s registered office for at leat 15 days before meeting
• Within 28 days return must be made to companies house
• Shares bought back must be cancelled and can’t be reissues
• Once shares are cancelled, nominal amount transferred to a capital redemption reserves
• Articles must permit use of capital to buy back shares
• A directors’ statement must be issued the the company will remain solvent & carry on business
• Auditor’s report must support above
• A Special resolution must be passed approving the payment
• A notice of the statement must be published to the London Gazette & a national newspaper within one week of resolution
• Payment for the shares

Question 24

Can a public company give financial assistance directly or indirectly to a person acquiring shares in the company?

Answer 24

No - not lawful

Question 25

What is financial assistance?

Answer 25

In broad terms, includes gifts, loans, guarantees, security / indemnities there are criminal consequences for a breach inf financial consequences rule

Question 26

What are the exceptions to the general rule against financial assistance by public companies?

Answer 26

* Money lent by a company in the ordinary course of its business * Dividends (lawful) * Employees share schemes * Loans to employees

Question 27

What is securitisation?

Answer 27

It's the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities

Question 28

What are debentures?

Answer 28

Certificates that are evidence of ownership of loan stock Debenture holder has a contractual relationship with the comapny

Question 29

What does it mean for loan stock to be unsecured?

Answer 29

The creditor has a contract with the company and their rights and remedies stem from contract law

Question 30

What does it mean for loan stock to be secured?

Answer 30

The lender has rights over the company's property against which the loan has been secured

Question 31

A company grants two types of charged - what are they?

Answer 31

Floating and fixed charges Effect of each is to increase the likelihood that the creditor will receive their money

Question 32

What is a fixed charge?

Answer 32

A charge that attaches to a physical asset and is created by the appropriate procedure for mortgaging property Debt secured by a fixed charge ranks first in order of priority in a liquidation

Question 33

What is a floating charge? and how do they rank?

Answer 33

A charge on a cost of an asset, present and future, which changes from time to time - eg raw materials Floating charges don't attach to the relevant assets until the charge crystallises (converted into fixed charge) Rank according to order of creation

Question 34

When should charges by a company be registered with companies house?

Answer 34

Within 21 days of creation

Question 35

What are the remedies for non-repayment for secured and non-secured loans?

Answer 35

If unsecured: an action to enforce payment of principal is limited to an action for payment of debt If secured: The holder may start and action for payment of debt / enforce its security by • Selling property / appointing a receiver Receiver is appointed by the debenture holder