CAPITAL OF THE COMPANY

• What is capital? The term capital is not defined in the

companies Act, 2002.However it is not a technical term. It has been mentioned in Narious provisions under the Companies Act 2002.Basically the term may be defined as the money subscribed pursuant to the memorandum of Association and forming the general fund of the company for use in its business.

Read casesFoster V. New Trinidad Lake Asphalt Co. Ltd.[1901] inc. 208Cross V. Imperial Continental Gas Association [1923] 2 ch. 553 at P. 565Verner V. General & Commercial Investment. Trust [1894] 2 ch. 239 at P. 265Money is always involved to set up and run a business.Normally in Companies with a share capital, the money is raised partly by issuing shares in the company and by the way of borrowing ie. Source of capital in a company are:debt financing- borrowing money from investors orequity financing- by raising money from share holder.

A share holder must pay the company for each share allotted to him and the money obtained provides the companies basic finance.

The meaning of capital may be narrowed as following;-

(Types of capital)

Nominal or authorized registered capital:

This is a nominal value of the shares which a company is authorized to issue by its Memorandum of Association.

An aggregate of the nominal value, of the shares which a company is authorized to issue by its memorandum.

The issued capital is the nominal value of the shares which are offered to the public for subscription.

Normally, a company does not issues all its capital at once, so that issued capital in such a case is less than nominal capital.

3.Called – up Capital

This is that part of the issued capital which has been called upon the shares.

4. Paid up Capital

Is that part of the issued capital which has been paid up by the share holders.

It is the reminder of the issued capital which has been paid up by the share holders or which is credited as paid up on the shares.

5.Uncalled Capital

This is the remainder of the issued capital which has not been called.

Actually the company may call this amount at any time subject to the terms of issues of shares and the provisions of the articles.

6.Reserve Capital This is part the uncalled capital which can

be called only in the event of winding up of the company.It cannot be returned into ordinary uncalled capital without the leave of the court and it cannot be charged by the company.It available only for the creditors on the winding up of the company.Berlet V. Mayfair. Prosperity Co. [1898] 2ch. 28

Read the following cases

Re Irish club Co. Ltd [1906] W.N. 127

Core gum Gold Mining Company of India V. George Paper [1892] AC 125

Re Theatrical Trust Ltd. Dr. Chapman’s case [1895] ich. 771

SHARES AND STOCK

What is share?

S. 2 of Companies Act, 2002 defines share

S.2. “Share” means share in the share capital of a company, and includes stocks except where a distinction between stock and shares is expressed or implied.

Share may be defined as a capital of company divided into certain indivisible units of a fixed amount. (indivisible units of a fixed amount of capital of the company).

• It is the interest of a share holder in the company measured by a sum of money for the purpose of liability. Share carries certain rights and liabilities. Thus it may be defined as a bundle of rights and liabilities.

• A share is evidenced by a share certificate issued by a company under its common seal.

What is stock?

• Stock is an aggregate of fully paid up shares, consolidated and divided into different parts.

• It may be transferred or split up into fractions of any amount without regard to the original face of the share.

• The main differences between shares and stock are;-

– A share has a nominal value while stock has no nominal value.

– A share may not be fully paid up while a stock is fully paid up

– Stock is transferred in small fractions while the shares can only be transferred in round numbers

– A share can be directly issued to the public while stock cannot be issued directly. Only paid up shares can be converted into stock

– The fractions or parts of the stock do not bear any distinctive numbers while the shares always bear distinctive number

– All shares are of equal denomination while stock may be of unequal amounts.

• TYPES OF SHARES

Although it suffices to divide the nominal capital into a specific number of shares of equal value, it is a frequent practice to have several classes (types) of shares carrying different rights.

These classes are;-

• Ordinary or common share

• Deferred shares

• Preference shares

ORDINARY/COMMON SHARES• Is the one which constitute the residuary class of

shares which is payable to the share holder after paying the fixed dividend to other classes such as preference shares.

• It is a normal share and usually called an equity.• It carries residual rights of participation in the

income of the company which have not been issued to other classes. Thus, ordinary shares carry the best in a prosperous company.

• They do not have fixed amount of dividends.

• They receive dividend after preference shares have received dividend and receive capital after preference shares have been paid capital.

• However they are good as they have voting powers. Each ordinary share has a voting right. This right is restricted in preference shares. Preference shares have this right only to meetings affecting them.

• (ii) Preference shares

• Is the one which possess some preferential rights over other classes of shares; usually the right to a fixed dividend out of the profit in each year before any dividend is a paid to the holders of other classes shares.

• Also it has preferential rights to the return of capital when the company is wound up.

• However, the preference is usually extends to dividends only unless the

articles provide that they should also receive preferential repayment of capital on winding up if the company becomes insolvent.

• Preference shares may be:– Cumulative – Non, cumulative

• Participating and redeemable

Cumulative preference shares.

• Is the one which carries the right to a fixed annual dividend such dividend being payable out of future profits if the current years profits are insufficient.

• The dividend on cumulative preference shares accumulates until it is paid.

• A Non Cumulative preference shares

• Is the one which carried the right to a fixed annual dividend, but if in any year the directors fail to declare the dividend for any reason, the right to dividend lapses ie. The shares holders of non – cumulative preference shares are not entitled to any arrears of dividend.

A participating preference share

• Is the one which possesses the right to a fixed dividend and in addition entitles the holder to participate in the surplus profit (if any) after the ordinary share holders have received a dividend at a stated rate.

• The general rule – preference shares are assumed to be non participating unless articles.

A non participating preference shares

• These shares are entitled to only a fixed rate of dividend and do not share in the surplus profits which go to the equity share holders.

A redeemable preference share

• Is the one which the company may issue on the condition that it may be repaid at the option of the company. Such shares must be fully paid before they can be redeemed or Founders / management.

(iii) Deferred shares• These are usually taken by promoters and they

are not entitled to profit unless preference share holder and ordinal share holders have been paid.

• They are the last class of shares in hierarchy of the company security i.e. they rank next to ordinary shares in the event of repayment of capital on winding up. They are very insecure.

• Nowadays these shares are very uncommon Promoters tend to use them the right to subscribe the shares of that category.

ISSUE OF SHARES

• Normally shares are issued at the nominal value. The law requires that shares should not be issued at a discount but should be fully paid up.

• Ooregum Gold Mining V. Roper [1892] A.C. 125.

MAINTAINANCE OF SHARES

• Share capital of the company must be protected in order to make sure that the company remains operating. In this endeavor, courts had developed capital maintenance rules.

These rules include:

• Prohibition of provisions of financial assistance by the company for purchase or subscription for its own, or its holding company’s shares – S. 57 companies Act 2002.

• Prohibiting a company to give financial assistance to a purchaser of its shares or those in its holding company.

• Companies are prohibited to declare dividends which have the effect of reducing / decreasing their capital etc.

ALTERATION OF A SHARES CAPITAL• Generally alteration of capital can be

effected by raising or reducing the company’s capital.

• (i) Raising Company’s Capital S. 64(1) empowers the company limited by shares or a company limited by guarantee having share capital, if so authorized by its articles, to alter the conditions of its meeting in the following ways.Increasing its share capital by the creation of new shares.

• Consolidating and dividing its share capital into shares of larger amounts.

• Converting paid up- shares into stock or reconverting stock into shares.

• Sub – dividing its shares into shares of smaller amounts.

• Canceling shares that have not been taken up and reducing the share capital by that amount.