FACULTY OF LAW

BACHELOR OF LAWS DEGREE

BUSINESS ASSOCIATIONS II,

COURSE UNIT: BUSINESS ASSOCIATIONS II

Volume TWO: SHARE CAPITAL, SHARES, ALLOTMENT OF SHARES,

TRANSFER & TRANSMISSION OF SHARES, BORROWING, DEBENTURES &
CHARGES, CAPITAL MARKETS & MAINTENANCE OF CAPITAL

Date:31st January 2020

1.0 Share capital:

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1.1 What is a share?

A share is a unit of ownership that represents an equal portion of a company’s capital.

Section 2 defines a share as share in the share capital of a company and includes stock except
where a distinction between stock and shares is expressed or implied. It entitles the
shareholder to an equal claim for the company’s profits. The shareholder also has an equal
obligation for the company’s debts and losses.

A share is a physical or virtual document the company issues and distributes to all its
partners. Shares are bought and sold in the stock exchange like the Uganda stock exchange.
Ownership of shares in a company entitles the shareholder to information about the company.
The company has to announce all the results and earnings ratios to its partners who hold
respective stock. Shares normally have a nominal or per value. This is the shareholder’s limit
to contribute to the company on an insolvent liquidation. Companies raise capital for their
business ventures through debt or equity.

Many companies have different classes of shares. Shares confer a number of rights on the
shareholder. Namely; ⁻ voting rights ⁻ Rights to dividends ⁻ Rights to any return of
capital. The total number of shares issued in a company represents its capital.Share capital
is the money a company raises by issuing common or preferred stock.

1.1.0 Share floatation:

Shares created on the stock aren’t equal based on the amount of capital issued. The float is
the number of shares actually available for trading. Float is calculated by subtracting closely
held shares -- owned by insiders, employees, the company's Employee Stock Ownership
Plan or other major long-term shareholders -- from the total shares outstanding.

1.1.1 Categories of Share Capital:

This range from Authorized, Restricted, Nominal, Paid up, Issued Capital and Unissued share
capital and all these have different attributes.

Investors need to know these terms so as to make informed decisions. Share capital can be
divided into nominal, paid-up, reserve and issued capital. Authorized shares are the total
number of shares of stock authorized when the company was created. Only a vote by the
shareholders can increase this number of shares.

Nominal capital must exist first before a company is registered. This is also called start-up
capital. This is usually shown in the company’s nominal statement. The capital can be
divided, depending on each shareholder's contribution in a company limited by shares.

Companies limited by shares have paid-up capital. Paid-up capital arises when members
pay for the shares issued out by the company.

Issued capital is the amount capital the company issues out. Issued capital can also include
nominal capital.

1.1.2 Types of shares/ classes of shares.

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A share is a unit of capital of a company. The case of Borland Trustees v Steel Bros & Co
Ltd [1901] 1 CH 279 defined a share as “an interest of a shareholder in the company
measured by the sum of money;- for the purpose of liability in the first place and of
interest in the second”.

1. Ordinary shares. This is the basic category. If all shares in the company are issued
without classification or categorization or differentiation, then they are all ordinary
shares. If the shares are divided into classes and special rights of some shares are set out,
then the remaining shares without any special rights are ordinary shares.

These are the most common type of shares. They are standard shares with no
special rights or restrictions. They have a potential to give the highest financial
gains. They also carry the highest risk. These are the last paid if a company is
wound.

2. Preference shares. These shares will usually be entitled to have dividends paid at a pre-
determined rate e.g. at a rate of 10% on their nominal value in priority to any dividends
on ordinary shares.These give the holder preferential treatment when annual dividends
are distributed to shareholders. They receive a fixed dividend. The shareholder has prior
rights to his dividend ahead of ordinary shareholders if the business is in trouble. They
are likely to be paid the per or nominal value of shares ahead of ordinary shareholders if
the business is wound up

3. Deferred shares. These are sometimes known as founders shares, they normally they
normally enjoy rights after the preference and ordinary shares, they have inferior rights.

4. Redeemable shares. These are created on the terms that they shall be bought back by
the company at a future time at the option of the company or the members.The company
can buy them back at a future date. This date can be fixed or it can be a choice of the
business. A company can’t issue only redeemable shares.

5. Non-voting shares. These may be issued to restrict control of the company to the
holders of the remaining shares. This is quite commonly desired when family controlled
company is involved and looks to outside investors for additional capital although it may
of course find that the investors are not prepared to put their money on those terms.

6. Shares with limited voting rights or enhanced voting rights.

7. Employee shares. Issued to employees and are ordinary in nature just that they enjoy
tax advantages.

1.2 Allotment of Shares:

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The word allotment is not defined in the Companies Act, 2012 .However, Section 61 of the
companies Act 2012 requires a company to file a return of the allotment of its shares with the
company Registrar within 60 days of the making of the allotment. Chitty Jin Re Florence Land
and Public works Company (1885) L.R.29 Ch. D 421stated:

What is termed allotment is generally neither more nor less than the acceptance by the
company of the offer to take shares…. The offer is to take a certain number of shares, or
such a less number of shares as may be allotted.

The above definition was adopted by the Supreme Court of Indiain Sri GopalJalan and
Company vs.Calcutta stock 1964 Air 250/1964 SCR (3) 698.

Gower and Davies,in Principles of Modern Company Law, 8th edition at page 845 define the
term ‘allotment’ as the process by which the Company finds someone who is willing to
become a shareholder of the company. Gower and Davies further explain that the process
of becoming a shareholder is a two-step one, involving first a contract of allotment and
then registration of the member1.

The term “allotment of shares” is sometimes confused with that of “issue of shares”; the two
terms are not the same. They are quite distinct and afford distinct rights to a person in law.
Distinguished from allotment, the term “issue of shares” is a subsequent act whereby the title
of the allottee becomes complete. In Ambrose Lake Tin and Copper Co (1878)8Ch. D 635 at
638 it was held: in as much as the term ‘issue’ is used, it must be taken as meaning something
distinct from allotment, as importing that some subsequent act has been done whereby the
title of the allottee becomes complete, either by the holders of the shares receiving some
certificate or being placed on the register of shareholders, or by some other step by which the
title derived from the allotment may be made entire or complete.(Emphasis of court)2.

Private Companies. This is the process through which a potential shareholder or subscriber is
given the number of shares which he has successfully applied for.

a) Private Companies:

1. A private company is not entitled to invite the public to subscribe to any of its securities.
See section 5 (1 (a) of the Companies Act, 2012;
2. A private company must in its Articles of Association contain a clause restricting the
right of transferability of its securities as far as its shares are concerned.

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Lord Templeman in National Westminster or Bank Plc vs. IRC (1995) A.C111 at 126 held that “allotment does not
make a person a member of the company. Entry in the register of members is also needed to give the allottee legal
title to the shares. Allotment confers a right to be registered as a member.” Lord Templeman further stated that an
applicant (for shares) is neither a member nor a shareholder while his rights rest in contract until the issue of the
shares has been completed by registration.

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In simple terms allotment of shares means the creation and issuing of new shares, by a company. New shares
can be issued to either new or existing shareholders. Share allotment can have implications for any existing
shareholders share proportion. Typically, new shares are allotted to bring on new business partners.

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Such clauses are called pre-emptive clauses. Lack of such a pre-emptive clause automatically
makes the company a public Ltd company.

(b) Public Companies.

Allotment of shares in public companies is the process through which the company distributes
the shares to successful applicants. Generally a company once it has gone through issuing a
prospectus or filing a statement in lieu of a prospectus, then allotment of shares can
proceed. If however, a company is making its first allotment, it’s not to allot the shares unless
the minimum subscription requirements have been satisfied.

A company isn’t allowed to transfer the shares after its first allotment unless the minimum
subscription, requirements have been satisfied. There must be enough working capital for the
day running of the business.

1.3 Share Certificates:

This is a document that shows one’s ownership of shares in a company. It is a written document
signed on behalf of a corporation that serves as legal proof of ownership of the number of
shares indicated. A share certificate is also referred to as a stock certificate.

A share certificate with a company seal is prima facie evidence that the owner has title to the
shares3. Prima facie evidence is evidence, which can be rebutted i.e. it is evidence on the face of
it, in other words it is not conclusive.

Section 91 provides for the issuance of share certificates within 60 days after the allotment.

1.3.1 Legal effects of share certificates:

1. It is prima facie evidence that the holder is the owner of the shares;
2. It estops the company from denying that the person to whom it is granted was at the date
of the issue of the certificate the registered owner of the shares issued;
3. It estops the company from denying that the company shares are paid up as indicated in
the certificate. Therefore if a third party detrimentally alters his position on the basis of
that certificate, he cannot be defeated by the company's denial of the certificate unless it
was forged;

1.3.2 share warrants:

A company can choose to issue either share certificates or share warrants. S. 95 of the
companies act, 2012, provides that a company limited by shares, if authorized by its
articles, may, with respect to any fully paid up shares, issue under its common seal a
warrant stating that the bearer of the warrant is entitled to the shares specified in it and
may provide, by coupons or otherwise, for payment of the future dividends on the shares
included in the warrant.

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Section 92 of the Companies Act, 2012.

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That a warrant described in subsection (1) of section 95 is, in this Act referred to as a “share
warrant”. A share warrant shall entitle its bearer to the shares specified in it, and the shares may
be transferred by delivery of the warrant.

Section 91(3) imposes a fine of twenty five currency points on the company and officers incase
of DEFAULT. The aggrieved allottee can serve the company with a note to give him his
certificate.

1.3.3Legal effects of share certificates.

Section 92. It’s prima facie evidence of ownership of shares. It estops the company from
denying the grant of the shares. It estops the company from denying the payment of the shares as
stated in the certificate.

Can be issued in place of a share certificate. Section 2 defines a share warrant according to
section 95(2). Section 95 authorizes a company limited by shares to issue a warrant in respect of
fully paid up shares.

There are two advantages of a warrant over a share certificate:

1) A Warrant is a share warranty that the bearer is the owner of shares indicated while the
share certificate is prima facie evidence that the holder is the owner of shares. Prima
facie evidence can be rebutted but a company cannot deny that the bearer of a warrant is
the owner. This thus makes the warrant more important.

2) A purchaser of a share warrant takes the shares concerned free of equities, i.e. he is a
bonafide purchaser and his interest cannot be challenged, while a purchaser of a
certificate must first be registered as shareholder before he can become a Legal owner of
those shares. When a purchaser of a warrant physically holds the same, he will defeat all
warranties.
1.4 Raising of share capital:

This can be one of the most difficult tasks of a company executive. It can be intimidating,
energy draining and time consuming. It can however, also provide critical fuel for continued
creation when the learning curve is gained.

1.4.1 Selling Common stock: share capital (equity):

A company can rise capital by issuing common stock if it’s in good financial health.
Investment banks help companies issue stock. They agree to buy new shares issued at a set
price if the public refuses to buy stock at a certain minimum price. Investors are attracted to
stock. The value of shares increases as investors expect the corporate earnings to rise.
Companies whose stock prices rise substantially often split the shares.

1.4.2 Borrowing4: This is debt finance:

4
See Article 79 Table to the companies Act, 2012.

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Government, local authorities, local development agencies and the European union are the
major sources of grants and soft loans. Grants are normally made to facilitate the purchase of
assets, generation of jobs or training employees. Soft loans are normally subsidized by the
third party. Companies can also raise short term capital by getting loans from banks and
lenders usually to finance inventories.

Types of facility:

a) Overdraft facility;
b) Term loan;
c) Revolving credit facility;
d) Syndicated facility.
e) Bank Guarantees.

1.4.3 Selling bonds: This is a capital markets:

A bond is a written promise to pay back a specific amount of money at a certain date or dates
in future. Bondholders receive interest payments at fixed rates on specific dates. Holders can
sell bonds to someone else before they are due. Bonds are advantageous due to the low
interest rate which is also considered as a tax deductible business expense. A company can
also raise capital by issuing preferred stock. Buyers of this stock have special status incase
the company faces financial trouble.

1.4.4 Retained Profits/ Capitalization of Profits:

Companies can finance their operations by retaining their earnings. There are varying
techniques used. Electric, gas and other utilities corporations pay out most of their profits as
dividends to shareholders. Others distribute 50% of earnings in dividends and keep the rest
for expansion and operation. However, small corporations re-invest their net income in
research, expansion and development.

1.4.5 Trade Credit (credit supplies):

For many businesses, trade credit is an essential tool for financing growth. Trade credit is
the credit extended to you by suppliers who let you buy now and pay later. Any time you
take delivery of materials, equipment or other valuables without paying cash on the spot,
you're using trade credit.

1.4.6 Capital markets instruments like bonds and commercial:

Capital market instruments used for market trade include stocks and bonds, treasury bills,
foreign exchange, fixed deposits, debentures, etc. As they involve debts and equity securities,
the instruments are also called securities, and the market is referred to as securities market.

1.5 Maintenance of Share Capital:

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This doctrine of maintenance of share capital is designed to protect the company’s creditor.
Case: Re exchange Banking Co (1882) Jessel MR: stated that, the creditor gives credit to
the company on the faith of the representation that the capital shall be applied for purposes of
the business. The creditor has a right to say that the corporation shall keep its capital and not
return it to the shareholders. A company is expected to be active; therefore the share capital
can’t be kept docile. The company must regulate the use of its share capital.

1.5.1 Outcomes of maintaining share capital:

Dividends paid to shareholders may only be paid out of a company’s profit. Capital invested
by shareholders can’t be returned to them except when;

1) Capital can be returned to the shareholders under the companies Act with Court’s
approval.
2) The company is put into liquidation;
3) The company redeems purchases its own shares.

1.5.2 The question is: why this strictness on maintenance of capital?

The rationale for this strict rule is that to safeguard the interests of the creditors of the company
and other people whose interests would be negatively affected by the reduction in the company’s
capital or assets. The House of Lords explicitly explained this in the case of Trevor V
Whiteworth(1887) 12 App Cas 409thus;

“one of the main objects contemplated by the legislature in restricting the power of limited
companies to reduce the amount of their capital is to protect the interests of the outside public
who may become its creditors, the effect is to prohibit every transaction between the company
and a shareholder by which money already paid to the company is returned to him, unless the
court has sanctioned the transaction”

In this case court went on to say

“paid up capital may be diminished or lost in the course of the company’s trading, that is a
result which no legislature can prevent, but persons who deal with and give credit to the
company naturally rely on the fact that the company is trading with a certain amount of
capital already paid; as well as upon the responsibility of its members for the capital
remaining on call and they are entitled to assume that no part of this capital which has
already been paid to the company has been subsequently paid out except in the legitimate
course of business”

In order to ensure strict observance of this, the law has come up with rules and provisions on
maintenance of capital. They include the following;

1.5.3 Rules/ Provisions On Maintenance Of Capital.

1. It is illegal for a company to acquire/ repurchase its own shares except as provided by
law.

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Thus a company cannot use its own capital to buy its own shares as was held in the case of
Trevor V Whiteworth above that it is ultra vires for a company to purchase its own shares
even if the memorandum gives express authority to do so.

2. A company may not issue shares at a discount unless as provided by law.

In Ooregum Gold Mining Co. of India Y Roper (1892) AC 125, the directors sought to issue
shares at a discount.It was held that shares are not to be issued at a discount and whoever takes
shares in return for cash must either pay or become to pay the full nominal value of those shares.
However the companies Act authorizes issue of shares at a discount subject to certain
conditions. S. 67 of the Act provides that a company may issue shares at a discount of a class
already issued except that;-

a) The issue of the shares at a discount must be authorized by resolution passed in a

general meeting of the company and must be sanctioned by court;
b) The resolution must specify the maximum rate of discount at which the shares
are to be issued;
c) The resolution can only be made after the company has already been in business
for more than a year;
d) The shares to be issued at a discount must be issued within one month after the
court has sanctioned the issue.
3. A company must not give financial assistance for the acquisition of its own shares.
A company is prohibited from giving financial assistance for the acquisition of its shares
to a person whether directly or indirectly. S. 63 of the Companies Act 2012 provides
that it shall not be lawful for a company to give whether directly or indirectly any
financial assistance for the purpose of or in connection with a purchase or subscription
made or to be made by any person of any shares in the company or its subsidiary or
holding company. Examples of such instances include the following;-

Exceptions to this rule/ instances where the company may give financial assistance as set
under section 63 (2) of the Companies Act, 2012:

a) The lending of money by the company; where the lending of money is part of the
ordinary business of a company;

(b) The provision by a company, in accordance with any scheme for the time being in
force, of money for the purchase of, or subscription for, fully paid shares in the company
or its holding company, being a purchase or subscription by trustees of or for shares to
be held by or for the benefit of employees of the company including any director holding
a salaried employment or office in the company;

(c) The making by a company of loans to persons, other than directors, in good faith in
the employment of the company with a view to enabling those persons to purchase or
subscribe for fully paid shares in the company or its holding company to be held by
themselves by way of beneficial ownership; and

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 (d) The assistance is given in good faith in the interests of the company.

4. If a company is to pay dividends then they can only be paid out of the company’s
profits but not out of its working capital.

Dividends are any return paid/given to a shareholder on his investment/shareholding in a

company. Unless the Articles state otherwise, a shareholder receives dividends on his shares.
A shareholder is not entitled to payment unless the directors have declared the dividends and
authorized payment of the same to the shareholders. In Makidayo Oneka Vs Wines And
Spirits (U) Ltd And Another (1974) HB.2, the principle was laid that unless the articles and
terms of the issue of shares confer a right upon a shareholder to compel a company to pay a
dividend; it is the discretion of the directors to recommend to a general meeting that a
dividend be declared.

If the company adopted table A, Article 116 provides that a company shall only pay
dividends out of profits. Furthermore, where a company has an article equivalent to article
114 of table A, if the directors have recommended a certain sum for dividend, the general
meeting has no discretion to increase that sum. However, a shareholder or a debenture holder
can seek a court injunction to restrain a company from declaring a dividend.

5. A company may not pay interest out of its capital except as authorized by law.
s. 75 of the Act provides that a company may pay interest out of its capital in certain cases in
particular where shares were issued so that the company can raise money to cover expenses of
construction of any works or buildings. The shareholders who paid for the shares may be given
interest on the money they paid and this interest may be paid out of the company’s capital.
However the payment is subject to the following conditions5.

a) The payment must have been authorized by the articles or by a special resolution.
b) The payment must have also been sanctioned/ authorized by the registrar of companies.
c) The registrar may first make an inquiry into the circumstances surrounding the entire
transaction before he authorizes the payment and he can charge the cost of the inquiry on
the company.
d) The payments must be made within the period fixed by the registrar.
e) The rate of interest must not exceed 5% per year.

6. A company may not reduce its capital except as provided by law.

Section 76 of the Companies Act, 2012; provides for the reduction of capital. A company may
by special resolution or if its articles provide so reduce its capital but this reduction must first be
confirmed by court.

1.6 Capital and Dividends:

5
See Section 75 (2) of the Companies Act 2012.

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A dividend is a cash payment paid to the shareholders. These are paid on a quarterly basis.
It’s a portion of corporate profits paid out to stockholders. The Corporations' profit can either
be re-invested in the business (retained earnings) or be distributed to shareholders. Cash is
distributed to shareholders through dividends or share repurchases. The doctrine of
maintenance of capital dictates that dividends are paid out of profits made out of share
capital.

1.6.1 Importance of dividends:

2 Attractive returns.
3 Companies that pay dividends are usually historically stable.
4 Less volatility-dividends help lessen the potential fall of a company's stock price.
5 Increased yield-dividends provide income Favourable tax treatment.

In the case of Case-Makidayo Oneka vs. Wines and Spirits Ltd and Anor (1974) Court
held that unless the articles and terms of issue of shares confer a right upon a shareholder to
compel a company to pay a dividend, the directors have the discretion to recommend to a
general meeting that a dividend be declared. A shareholder or a debenture holder can seek a
court injunction, restraining a company from declaring a dividend. The Companies Act states
that dividends have to be paid out of profits, but “what are profits?”.

Lee Neuchattel Asphalt Co (1889) 41 Ch. D. 1, at p. 13.A company was formed to work
out a concession in a mine. It proposed to pay a dividend out of the profits on its reserve
account. This has challenged by a shareholder on grounds that since the company's assets
weren’t equal to its share capital and the mining concession was wasting asset, dividing
annual proceeds amounted to dividing the company’s capital assets.

Court rejected the shareholders contention and held that: There was nothing in the act to
say how accounts are kept, what is to be put into capital accounts, income accounts and
what’s to be left to the men of business. Losses of capital need not to be made good before
the company declares a dividend.

This is called a declarational announcement date. Companies who effectively manage their
cash flow tend to sustain and grow their dividend pay-outs over time. Dividends are normally
declared at the company’s general meeting. Shareholders however, act on the director’s
recommendations. They shouldn’t exceed this.

Legal rules relating to dividends shouldn’t be paid if the company will consequently be
unable to pay its debts. It’s permissible to pay dividends out of profits without making up
losses on fixed capital. Losses of previous years need not be made good before payment of a
dividend. Profits of previous years may be distributed by way of dividend from a reserve
fund.

A profit made on the sale of a company’s fixed assets can be distributed to members by way
of dividend. Competent values permit a company to distribute a surplus on its capital account
which results from a revaluation of the company’s assets made in good faith.

1.7Debentures:

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 A Debenture is a paper/ document indicating an indebtedness of some kind of permanence of
the company. The debenture is an acknowledgement of a distinct debt. Section 98 provides
for a register of debenture. Section 2 defines a debenture to include debenture, stock, bonds
and any other securities of a company whether a charge on the company assets or not.

A private company may create debenture stock since it’s not allowed to raise money by
borrowing from the public. A debenture stock is a loan fund created by the company. It can
be divided among various creditors all who hold a debenture stock certificate.

1, 7.1Differences between a debenture and a debenture stock:

1.7.1 Debenture.

1 They rank according to the time of issue.

2 The debentures take priority over all other debentures on repayment.
3 The debenture is a document which acknowledges a distinct debt.

1.7.2 Debenture stock.

1 It is a fund each beneficiary ranks in paripassu with others.

2 A debenture stock is created by a private company as it’s not allowed to borrow from the
public.
3 A debenture stock is a loan fund created by the company which is visible among various
creditors.

1.8 Issuance of shares:

Shares can be issued at premium, nominal and discount levels Section 66 provides for the
issuance of shares at a premium Section 67 authorizes the company to issue shares at a
discount when;

1) The issue of shares at a discount has been authorized passed in a general meeting with
the sanction of court.
2) The resolution must specify the maximum rate of the discount at which the shares will
be issued.
3) Not less than one year must at the date of issue have elapsed since the date on which
the company was entitled to commence business.
4) The shares to be issued at a discount must be issued one month after the date on
which the issue is sanctioned by court or within such extended time as the court may
allow.
5) A company which has agreed to issue shares at a discount must apply to court for an
order sanctioning the issue under section 67 (2);
6) Section 68 provides for the company’s power to issue redeemable preference shares.
It’s however, vital to issue a member with a share certificate.

1.8.1 Increase of issued capital:

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The general rule is that the company’s issued capital shouldn’t be increased unless the
company’s ordinary business warrants such a steps. The rationale is to maintain the capital
fund upon which the creditors rely for payment. In the case of Flitcofts (1882)21 Ch.D. 519:
The directors had allowed debt to be credited in the company’s accounts creating imaginary
profits with the knowledge that debts were bad. It was held that the creditor has no other
debtors other than the company . He therefore has the right to insist that the company
must keep its capital and not return it to the shareholders. Dividends must therefore only
be paid out of profits.

1.9 Transfer and transmission of shares:

Transfer of shares is a means of transferring the ownership rights from one person to another.
It is a voluntary act of the members. Transfer of shares also refers to the transfer of title to
shares, voluntarily, by one party to another. Transmission of shares6 means the transfer of
title to shares by the operation of law. Deliberate act of parties. Insolvency, death,
inheritance or lunacy of the member. Transfer and transmission of shares is based on the type
of the company. Public companies can transfer shares among themselves and also to
members of the public Private companies are prohibited from transferring shares to the
public. The transferee should have proper instrument of transfer, this has to be registered
under section 85. Most companies regulate the procedure of transfer and transmission
through the articles of association.

In the case of Re Smith Vs Fawcett Ltd (1942): The company’s articles of association gave
the directors uncontrolled discretion to refuse to register any transfer of shares. The company
had two directors and two shareholders, Smith and Fawcett. Fawcett died and Smith and the
new director refused to register a transfer of his shares. It was held by Lord Greene that
where articles confer on the directors a discretion to refuse to register a transfer, they must
exercise their powers bonafide but subject to this qualification, they must be given absolute
discretion. In the case of Simm Vs Anglo American Telegraph Co. (1879); Court stated
that a certificate issued due to registration of a forged transfer means that no estoppel arises
against the company in favour of the person who submitted the transfer for registration.

1.10 Financial assistance:

1) It is unlawful for a company to assist anybody to purchase its shares. It’s like a
donation. It reduces the share capital. However, this isn't applicable where:
2) The Company lends money as part of it's business;
3) The company subscribes for its shares so as to help its employees;
4) Any security for a mortgage for a loan isn't recoverable in such instances. The money
lenders can’t sue for the loan;

1.11 Company repurchasing its own shares Case: Trevor Vs Whiteworth (1887) Facts:
During winding up, a shareholder claimed the balance of the principal for fully paid up shares
he had sold to the company before winding up. It was held that it was ultraviresfor a company
to purchase its own shares albeit the memorandum gives authority to do so. The transaction is
6
See Section 85 & *6 of the Companies Act, 2012.

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also objectionable on the following grounds: The value of the remaining shares is curtailed if
the company paid more than the actual value of shares. The company is adversely affected if
it repaid the principal on the stock exchange. Repurchasing is different from forfeiture or
surrender.

1.12 Lien on shares:

A lien is a right to retain possession of anything until a claim is satisfied. A company lien on
a share means that a member won’t be allowed to transfer his shares until he pays the
company debt. Articles provide that the company shall a first lien on each member’s shares
for his debts and liabilities to the company. The right of lien isn't inherent. It must be
provided in the articles. The company may have lien on fully paid up shares, dividend
payable on the shares, unpaid calls.

1.13 Surrender of shares:

Shares are surrendered when they are voluntarily given up. A company may authorize its
directors to accept a surrender of shares. The surrender is valid when the shareholder is
willing to surrender. The surrender should be done to relieve the company from the formality
of forfeiture. Surrender and forfeiture have the same effect. Only difference is that surrender
is done with the shareholder’s consent. Forfeiture is however, done at the company’s
instance.

A surrender of shares will be void;

1) If it amounts to a purchase of shares by the company.

2) Surrender will be void if it’s intended to relive a member of his liabilities.
3) Every surrender of shares involves a reduction of capital which is unlawful except
when sanctioned by leave of court.
4) A valid surrender of shares makes a person cease to be liable for contribution as a past
member if the company wound up 12 months after his surrender.
5) Validity surrender shares can be reissued in the same way as forfeited shares.

1.14 Forfeiture of shares:

A company can only forfeit shares if its articles provide for it. The directors may forfeit than
shares of a shareholder who fails to pay the amount due on any call if this is authorized by the
articles. Shares can only be forfeited for non-payment of calls.It’s illegal to attempt to forfeit.
A person whose shares have been forfeited ceases to be a member in respect of those shares.
The right to forfeit shares must be pursued with the greatest exactness. The provisions of the
companies Act must be strictly followed. Forfeiture must be by properly appointed directors
at a meeting with quorum. Any irregularity in the process makes the forfeiture illegal.

1.14.1 Pre requisites of forfeiture:

The shareholder must be given notice requiring him to pay the money due on call with
interest. The notice must specify a date, not being earlier than the expiry of 14 days from the

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date of service of notice on or before which payment is to be made. It must also state the date
on which the share will be liable for forfeiture in event of non-payment. There must be a
proper board resolution. The power of forfeiture must be exercised bonafide and for the
company's benefit. Forfeited shares become company property.It involves a reduction of
company capital. The forfeited shares may be sold for any prices they fetch even a discount.

1.15 Fixed and floating charges:

Fixed and floating charges are used to secure the company’s borrowing. Section 2 defines a
charge as a form of security for payment of a debt, performance of an obligation consisting of
the creditor’s right to receive payment out of some specific fund or out of the proceeds of the
realization of specific property including a mortgage. Section 105 provides for the
registration of charges with the registrar. Section 106 imposes a duty on the company to
register the charges it creates. A floating charge 7 is a type of security only available to
companies. It’s an equitable charge on the company’s present and future assets. It allows the
company to borrow although it has no specific assets.

A fixed charge applies to a specific identifiable asset, while a floating charge is dynamic in
nature and generally applies to the whole of the company's property. An asset covered by a
fixed charge cannot be sold or transferred unless the charge holder agrees.If a debt is
subject to a fixed charge, the borrowing will be secured against a substantial and
identifiable physical asset such as land, property, vehicles, plant and machinery.If the
business is unable to keep to the terms of the finance agreement, the lender will take
charge of the asset and look to sell it in order to recoup the money it is owed. When a
lender has a fixed charge, it effectively has full control over the asset the charge applies
to. If the business wants to sell, transfer or dispose of the asset, it will have to get
permission from the lender first or pay off the remaining debt. It’s also important to note
that a fixed charge gives the lender a higher position in the queue than a floating charge
for the repayment of the debt in the event of the borrower’s insolvency.

A common example of a fixed charge in practice can often be seen in factoring or

invoice discounting facilities. In this type of arrangement, the finance provider buys a
business’s outstanding invoices and lends money against them. The debtor book is then
subject to a fixed charge, which means the business’s invoices effectively belong to the
finance provider and not the company.Examples of financial arrangements that are
commonly subject to a fixed charge include:

 Mortgages
 Leases
 Bank loans
 Invoice factoring arrangements
 A floating charge applies to assets with a quantity and value that can change
periodically, such as stock, debtors and moveable plant and machinery. It gives
the business much more freedom than a fixed charge because the business can
sell, transfer or dispose of those assets without seeking approval from the lender
or having to repay the debt first.

7
Section 104 of the Companies Act, 2012.

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From the lender’s point of view, a floating charge leaves it more exposed than a fixed
charge because the value of the assets can and will change over time. However, it’s not
possible to attach a fixed charge to every company asset, which is why floating charges
are used. Floating charges essentially ‘float’ above changing assets and only become
fixed charges, a process known as ‘crystallization’, in the following circumstances:

 The company defaults on the repayment and the lender takes action to recover the
debt;
 The company is about to be wound up ;
 The company appoints the receiver;
 The company will cease to exist in the future;

There are a number of major differences between fixed and floating charges:

1. A fixed charge applies to a specific identifiable asset, while a floating charge is

dynamic in nature and generally applies to the whole of the company’s property;

2. An asset covered by a fixed charge cannot be sold or transferred unless the charge
holder agrees. A floating charge can be sold, transferred or disposed of until a
point when it crystallizes and becomes fixed;

3. A fixed charge is given preference over a floating charge in insolvency.

1.16 Conclusion:

The raising of capital has a direct impact on the value of shares due to the laws of demand
and supply. The doctrine of raising and maintaining capital is essential to the management of
a company. Share capital is vital for a company’s finances. It promotes the capital
maintenance doctrine by securing the company’s distributable profits.

END

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