Welcome in the series notes of “Corporate and Business Law” ACCA F4, “Capital and Financing” is the last topic in the series notes of “”Corporate and Business Law” ACCA F4.
Capital and Financing
Capital: Capital is the fund in the business, Simply the fund which helps a business to run.
Finance: finance is the term which defines management of money, Like the banks, capital, credit, debts etc.
Share capital is the capital which is obtained by the shareholders means capital obtained by issuing of shares. Shareholders has voting right in the (AGM) but in a condition if shareholder held specific number of shares.
Types of shares
Ordinary shares: these are the shares which is common and the person who has these kind of shares are shareholders.
- They have full right to give vote
- Dividend is paid after preference shareholders
- In the time of liquidation they are finance after the preference shareholders
Preferences shares: These are the secured shareholders who has fixed interest in the company whether company make profit or loss.
- They have not right to give vote
- Dividend is paid very first and has fixed interest
- In the time of liquidation they are finance first but they have not any right on company’s surplus.
Terminology of Shares
Issued Share Capital: Actual shares which is already sold means the capital which issuing shares.
Paid Up Shares Capital: After issues of share how much money received from those shares.
Called Up Shares Capital: Pending amount from the issued shares.
Uncalled Share Capital: The amount for which a company still not called.
Rights Issues, Bonus Issues and Statutory pre-emption right shares
Rights issues are offers to existing shareholders for making fund available charge for extra shares and available for existing shareholder not for public.
Statutory pre-emption right shares can offer shares to public as well (Difference between Rights issues and Statutory pre-emption right shares is only that right issues offers only existing shareholders but Statutory pre-emption right shares can offers shares to general public.
Bonus issues are offers for free of cost.
How to Issue Shares
Allotment of shares
Shares are allowed by a company under the contract of allotment, Once the holder is entered in the member’s register it becomes a shareholder or a member of a company.
Note: Directors need authority or power to allow or allot share, Authority maybe given by,
- Passing the ordinary resolution
Must state that how many shares a director can allot and must state time duration authority to allot share usually five years.
Note: When a share is issued greater then its nominal value it is said to be premium ex.(If there is face value of a share is $10 and nominal value is $8 then $2 is the security premium).
This premium can be used in,
- Writing off expenses occur during issuing of shares
- Commission paid during issuing of shares
- Issuing bonus shares
If there 100000 shares in a company and 75% of the shareholders satisfy with the variation, but there are some shareholders who has very few shares in the company then can appeal in the court to cancel the variation if the get 15% of the shares.
The variation will only cancel if there is unfair in changes/variation and it effects the rights and power of those shareholders who has very few shares in the company. Variation may cancel within 21 days from the court after passing the resolution.
Some Important sections under Companies Act 2006
|s584||Cash must be paid by the memorandum subscriber on their subscription|
|s585||Share payment is not acceptable in form of work or service|
|s586||Share should not be transferred until the payment made at least 25% or 50%|
|s587||If there is non-cash consideration then it must be received within 5 years|
|s593||If non-cash consideration is given then a company must appoint an outsider to estimate the value for that consideration and must be done before the 6 months of allotment|
Purpose: The main purpose for capital maintenance is that company can not give its fund to its shareholders directly nor indirectly, as a general rule company can not reduce its capital.
Exception: Company can reduce its capital by,
- Reducing its liability
- Reduce excess capital
- Cancel Paid-up capital if it is no longer denotes as an asset
Public Company Procedure to Reduce Capital
|Pass the Special Resolution|
|Confirm about the Special Resolution from the court|
|Court may require from a company to settle its debts|
|Court will not confirm until debts fully paid or give a written notice|
|Company’s must submit a file or a document if its capital fall below 50000 pounds|
Private Public Company Procedure to Reduce Capital
|Pass a special resolution and have solvency statement|
|Solvency statement by every director that state all debts can be payable within the year|
|Fake solvency statement is an offence and may have punish of imprisonment or fine|
|Copies of resolution and solvency statement must be sent to registrar within 15 day|
When a company buy back its own shares from other shareholders and keep those shares under its power those shares are refer as “Treasury Shares“.
In the past Treasury Shares can only be allowed by public companies but after 30th April 2013 private companies ca also keep “Treasury Shares“.\
Companies can buy back its shares from the profit. 10% of the companies shares can be used as “Treasury Shares“.
Companies must cancel these share by their nominal value. Company can buy whole shares and can use it for resale as well. “Treasury Shares” has not voting right nor they get dividend.
If the company gives that share to its employee, It has to inform registrar within 28 days after disposing the shares.
In cancelation of shares (Treasury Shares) a company does not need for authorization or court permission because those shares are buy back from the company’s profit not from the capital.
If a company want to distribute, it can be done by the profit in the form of dividend. Distribution can only occur by the company’s profit. (Distribution profit is the retained earning).
Distributable profit = Profit for the year – Accumulated loss
Note: Accumulated means sum or total
Public Companies rules for dividend
Public companies can declare dividend if their share capital and reserves such as retained earning is more then its net asset (Net asset = Total asset- all debts).
Reserves that are not distributable
- Share premium/security
- Revaluation reserves or surplus
- Reserves that company can not distribute
- Capital redemption reserve
Note: Under the “Model Article” directors recommends the dividend not shareholders. Directors declare dividend by passing ordinary resolution. It is not necessary if a company made profit then shareholders are entitled for dividend.
Borrow money for some purpose and pay interest on that amount and after specific time return that money to creditors.
Loan Capital is the long term liability
- Permanent bank overdraft (Credit card)
- Loan from bank or other party
- Loan on the bases of assets
It is form of a loan which is taken from the general public and pay them interest. It is in form of a document which tells whether general public can sell company’s asset in the event when company will unable to pay its debts.
Three types of Debentures
- Single debenture (Bank loan)
- Issued debenture (Issue a series of registered debentures, Loan by public)
- Stock debenture (Subscribe by a large number of lenders)
Fixed And Floating Charge
Fixed Charge: Mortgage on a specific asset such as land.
Floating Charge: Mortgage on stock maybe variable means changeable value in the future.
Crystallization: When a company can not freely deal with the assets, This situation can be occurred,
- When a company is on liquidation condition
- Unable to pay loan, debts, fail to care the stock etc
- Company is going to finish the work
|Loan Capital||Share Capital|
|They have not voting right||They have voting right|
|They get interest||They get dividend|
|Pay first in liquidation||Pay later in liquidation|
|Capital is not necessary to maintain||Capital is necessary to maintain|
So guys here we end the topic “Capital and Financing”, We try our best to explain each and everything about “Capital and Financing”.
Hopefully you like Capital and Financing notes and this is the last topic in “Corporate and Business Law” ACCA F4 paper.
All the F4 notes are available on the site we will try to post practice questions very soon. You can find Capital and Financing practice question very soon.