Share this content
6

Unpaid share capital

Shareholder has bought out the majority shareholder by transferring his unpaid share capital

Didn't find your answer?

A relatively new company has exhausted Shareholder B and C intial capital injection and Shareholder A (who put no capital into the company) has quit transferring his 70% stake of unpaid shares to B for £1.

B is now the sole director and now holds 95% of the share capital but has the unpaid share capital liability transferred to him (as I understand it).

I'm thinking that a share capital reduction could be done to get rid of this liability however I would dilute his shareholding so does anyone have any simpler ways of tackling this problem?

Look forward to your thoughts.

 

Replies (6)

Please login or register to join the discussion.

avatar
By WhichTyler
05th Jan 2018 13:02

This is put up or shut up, isn't it? The company belongs to those who have paid for the shares, so I'd suggest that B&C have been 'diluted' to date by not having the control their investment warrants.

Does the shareholders agreement have anything to say about it? (always optimistic)

Thanks (0)
Replying to WhichTyler:
Portia profile image
By Portia Nina Levin
05th Jan 2018 13:30

WhichTyler wrote:

This is put up or shut up, isn't it? The company belongs to those who have paid for the shares, so I'd suggest that B&C have been 'diluted' to date by not having the control their investment warrants.

I don't (necessarily) agree with this part of your post. It is perfectly possible, as a matter of company law, for some shareholders to be paid up, and some not, with their rights and entitlements referenced to the shares that they hold, whether or not paid up.

What will be important are the company's articles, and any shareholders' agreement.

Thanks (1)
Replying to Portia Nina Levin:
avatar
By WhichTyler
05th Jan 2018 13:39

I'm sure you are right.

In these circumstances,the OP is trying to extinguish the shareholders (acknowledged) liability without the simple option of paying for the shares. If the co has now no reserves with which to operate, shareholder B has 95% of something which is worth zero...

Thanks (0)
Portia profile image
By Portia Nina Levin
05th Jan 2018 13:34

What "liability"? Unless the directors have called up the shares, there is no "liability", as such.

The amount unpaid on shares represents the maximum amount that a shareholder can be expected to contribute to the company's liabilites in the event of a liquidation. Hence the term "limited liability" (for the company's debts).

C has been disadvantaged in consequence of the transaction between A and B, which may or may not be permissible under the company's constitution.

B and C need separate advice, unless the company is already [***] up, in which case B has bought a problem for £1, from which the company's governing documents might save him.

Thanks (0)
Replying to Portia Nina Levin:
blue
By mg200
06th Jan 2018 12:09

The liability is the unpaid share capital (c£30k so not immaterial). And my concern is exactly what you say i.e. in the event of liquidation he will be expected to put money in that was never the intention.

The bottom line is that when the company was formed by A, he made many mistakes and had no intention of putting in any money, so why he subscribed for shares with nominal value of £30k is beyond me but that is where we are.

As this is a start up company and they are potentially going to do a round of equity funding too and we need get things straight.

I'm not sure why C is diluted in the transfer of shares between A & B. He still owns 5% of the shares.

However as we stand today B owns say 60% of the ordinary shares (unpaid) and 35% of the shares (paid up) and C has 5%. If we reduce the share capital to cancel the unpaid shares then B would be diluted. So perhaps I would be better to issue some further shares at a much lower nominal value to get B back to 95%?

Thanks (0)
avatar
By johnt27
10th Jan 2018 12:03

I think as others have said - unless the shares were called then the liability technically doesn't exist and shareholder A has gotten away with shareholder B (presumably) not taking appropriate advice. Where was the shareholders' agreement!!

However, I do think your cap reduction idea has some mileage - bear with me - assumptions galore! By my maths, you have 50,000 £1 shares in play so shareholder C has 2,500 fully paid up and B has the rest split 30,000 unpaid and 17,500 paid. Why not do a 90% share cap reduction which leaves C with 5% or 250 shares. B would be left with 4,750 shares with £3,000 uncalled, unpaid.

C is technically disadvantaged because he paid £2,500 for 250 shares but his base cost/tax position/ownership stake is the same, whilst B "only" paid £17,500 for 4,750 shares.

You could, of course, take this further but I wonder if we have a posh lc here with £50k share cap? Which would muddy the waters somewhat...

Thanks (0)
Share this content

Related posts