(b) It is a long established rule that companies are not permitted to issue shares for a consideration that is less than the nominal value of the shares together with any premium due. The strictness of this rule may be seen in Ooregum Gold Mining Co of India v Roper (1892). In that case the shares in the company, although nominally £1, were trading at 12·5p. In an honest attempt to refinance the company, new £1 preference shares were issued and credited with 75p already paid (note the purchasers of the shares were actually paying twice the market value of the ordinary shares). When, however, the company subsequently went into insolvent liquidation, the holders of the new shares were required to pay a further 75p.
This common law rule is now given statutory effect in s.580 CA 2006. If a company does enter into a contract to issue shares at a discount it will not be able to enforce this against the proposed allottee. However, anyone who takes shares without paying the full value, plus any premium due, is liable to pay the amount of the discount as unpaid share capital, together with interest at 5% (s.580(2)/CA 2006). Also any subsequent holder of such a share who was aware of the original underpayment will be liable to make good the shortfall (s.588 CA 2006).
The reason for such rigour in relation to preventing the issue of shares at a discount is the protection of the company’s creditors. Shareholders were seen to enjoy the benefit of limited liability but that privilege was only extended to them on the basis that they fully subscribed to a company’s capital and in turn that capital was seen as a creditor fund against which they could claim in the event of a dispute.
In private companies it is possible to avoid the strict effect of this rule by exchanging shares for property that is overvalued (re Wragg (1897)). In public companies all such non-cash consideration has to be valued (s.593 CA 2006). Equally the effect of issuing shares at a discount may arise where the company pays underwriting commission under s.553 CA 2006 which permits a company, subject to authorisation in its articles and to disclosure, to issue shares at up to a 10% commission.
It should also be noted that the above only applies to shares. Debentures may be issued at a discount. This is the case even where they are convertible into shares, as long as they do not carry an immediate right to conversion (Mosely v Koffyfontein Mines (1904)). |
