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Unpaid Share Capital and Shares have been sold

Who is liable for share capital if original unpaid shares were sold from one shareholder to another

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Hi all,

One of the company I am working with has 100,000 shares of £1 each and three shareholders. These shares were never paid and all three of them sold their shares to the investor for an X amount (£5 per share you can assume) and the investor then paid the X amount to the share holders and the remaining shares will be bought by the investor for £1 only this month.

The question is who is liable for unpaid share capital. My understand is that the investor has bought the shares directly from the shareholders and unpaid share capital has nothing to do with the investor. The original shareholder will remain liable for the unpaid share capital even if they exit and if the company goes into liquidation then they will be personally liable for this. What do you guyz think.

The second questions is how to reduce the share capital if the shareholders do not pay up. The company is not solvent and it has negative net assets but it is being supported by the investor and the company has the letter of support and it can pay its liabilities for the next 12 months so on this basis, can the directors confirm the company is solvent and submit SH19 form to the Companies House.

Alternatively, I was thinking of the company buying the share back from them (Credit Unpaid Share Capital sitting in debtors and Debit Share Capital) and it can then sell it to the investor for £1 each. Will this acheive the same outcome as reducing share capital, surely I am making a mistake here?

Thank you for your help everyone.

 

 

 

Replies (35)

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RLI
By lionofludesch
01st Feb 2021 18:26

What does the sale agreement say ?

Was the buyer made aware that the shares weren't paid up ?

It's not unlawful to sell part paid shares.

It is unlawful to tell the buyer that the shares are paid up when they aren't.

As regards the second question, is it intended to cancel the shares for non-payment ?

Has there been a call on the shares ?

So much information to be gathered ...........

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Replying to lionofludesch:
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By Prestige Bookkeeping
02nd Feb 2021 09:39

The sale agreement is silent.

Buyer was not aware shares were not paid up. This question was never raised by the buyer.

Yes, the intention is to cancel the shares for the non payment.

We have asked the directors to pay for the shares so I suppose there has been call on the shares.

The shares which were sold were minimal but now the entire share holding will be transferred to the investor so the questions is who will be liable for the unpaid shares?

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Replying to Prestige Bookkeeping:
RLI
By lionofludesch
02nd Feb 2021 10:36

Prestige Bookkeeping wrote:

We have asked the directors to pay for the shares so I suppose there has been call on the shares.

What's your relationship to the company that you have power to make a call on the shares ?

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By frankfx
01st Feb 2021 19:11

Did the purchaser look at companies House.
Then take action thereafter.

However reality check.
The new shareholder is likely to be a director.
What is risk that he will have to make a call on the shares?

Caveat emptor

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Replying to frankfx:
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By Prestige Bookkeeping
02nd Feb 2021 09:41

The Companies House showed shares to be paid but there was a debtors balance in the books for unpaid shares.

The chances are the entire share holding will be bought by the investor for £1 so who is then liable for unpaid shares. Investors or Original share holders?

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Replying to Prestige Bookkeeping:
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By johnt27
02nd Feb 2021 10:03

If there's a debtor balance in the books then it sounds like the shares were called but not paid. Therefore that debtor rests with whoever was the shareholder when the call was made. If this was the case it should be detailed in the SPA as any debtor/credit balance with a connected party would likely have a mechanism to be settled within the SPA either by straight addition/deduction from proceeds or by way of working capital adjustment.

It sounds like somewhere along the way here someone has dropped the ball

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Replying to Prestige Bookkeeping:
RLI
By lionofludesch
02nd Feb 2021 11:02

Prestige Bookkeeping wrote:

The Companies House showed shares to be paid but there was a debtors balance in the books for unpaid shares.

Ah! Now we're dragging it out of you !

Unless there's some agreement to the contrary, that debt is not assigned and whoever it was still owes the money.

What made you think that that nugget of information wouldn't be important ?

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By Paul Crowley
01st Feb 2021 20:36

Did the 'investor' do any due diligence?
Did he do a 30 second search of companies house?

Investor really needs to accept this as a lesson on what goes wrong if he does not have a clue how companies operate

Always best to ask someone who knows

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By Tax Dragon
01st Feb 2021 20:52

Presume those aren't the actual numbers, as it makes no sense, but even so, no matter how prestige your bookkeeping, I think you should be steering clear of giving legal advice.

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Replying to Tax Dragon:
RLI
By lionofludesch
01st Feb 2021 23:21

Tax Dragon wrote:

Presume those aren't the actual numbers, as it makes no sense, but even so, no matter how prestige your bookkeeping, I think you should be steering clear of giving legal advice.

People often post stuff that makes no sense.

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Replying to lionofludesch:
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By Prestige Bookkeeping
02nd Feb 2021 09:42

The numbers are actual apart from the sale price of £5 per share. The entire shareholding will be bought by the investor for £1.

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Replying to Prestige Bookkeeping:
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By Tax Dragon
02nd Feb 2021 10:35

"Will be" future tense?

I hate it when OPs change their stories.

But I have some real-life advice for you: check with your insurers about whether you can do what you are doing.

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Replying to Prestige Bookkeeping:
RLI
By lionofludesch
02nd Feb 2021 11:01

Prestige Bookkeeping wrote:
The entire shareholding will be bought .....

[sigh]

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By Truthsayer
01st Feb 2021 22:43

This is a matter for a solicitor to advise on. Just do the book-keeping to follow their legal advice.

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Replying to Truthsayer:
Flag of the Soviet Union
By thevaliant
02nd Mar 2021 09:55

I'm not sure it is. I bet if you asked on a legal forum, they'd say it was an accounting question. Though that might be because each profession does love to pawn off the problem as relating to 'the other side'.

Funny tale, related.

Plastic PLC set up in early 2000s - £100k share capital. Only £40k paid and called for. Annual returns submitted saying all shares fully paid up (they weren't).
My client bought plastic PLC in late 2000s. Solicitor advising on deal noted discrepancy between accounts and annual return and was advised that accounts were right, shares were unpaid. They offered no further advice.
We prepare accounts, dutifully every year thereafter, with share capital showing lower £40k.
New group is getting bigger and bigger and more successful.
Two years ago, client group announces intention to get external funding a looking to AIM list in three to five years time. We're dumped as accountants/auditors (we're only a small local firm). Big 4 taken on.

I look last year. Share capital is suddenly fully paid up in the accounts.
I can't quite tell, but it looks like CR Share capital, DR P&L account (profits for the year are, strangely, about £60k lower than I'd normally expect having done their accounts for nearly a decade).

Best way forward. Hopefully they've claimed CT relief as well.........

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Melchett
By thestudyman
01st Feb 2021 23:37

Looks like the previous owners did not know what they were doing with the 100k share capital.

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By Paul Crowley
02nd Feb 2021 04:39

If the share capital has not been called up
Then the owner of the share is liable when the call is made

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Replying to Paul Crowley:
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By Tax Dragon
02nd Feb 2021 06:29

That may be the primary position, but it doesn't mean the owner is necessarily the one that would have to pay - so it depends what you mean by "liable". But I stand by both legs of my comment - numbers make no sense* and it's a legal matter.

*But if it's really just 100 shares, or 10 shares, or (your favourite) 1 share, then who cares? Maybe that explains the daftification in the OP.

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Replying to Tax Dragon:
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By Paul Crowley
02nd Feb 2021 09:57

I do have one company with 114,004 shares
Created before my time

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
02nd Feb 2021 10:38

"Now it's a legal matter, baby
You got me on the run
It's a legal matter, baby
A legal matter from now on"

I wonder if all A web questions can be answered with song lyrics.

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Replying to DJKL:
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By Tax Dragon
02nd Feb 2021 10:54

DJKL wrote:

I wonder if all A web questions can be answered with song lyrics.

If Justin won't give the undumb answer, maybe the wisdom of the soulful lyricist is the next best thing.

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Replying to Paul Crowley:
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By Prestige Bookkeeping
02nd Feb 2021 09:45

So is it the owner of the share at the time who remains liable and not who owned it in the first place?

My understanding was sale between two individuals has nothing to do with the company and original owner remains liable?

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Replying to Prestige Bookkeeping:
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By Paul Crowley
02nd Feb 2021 09:53

That is a very odd understanding

New owner then calls up share capital 50 years later?

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Replying to Prestige Bookkeeping:
Flag of the Soviet Union
By thevaliant
02nd Mar 2021 09:30

I don't think that's right. As Paul says, lets say this situation persisted for a long period of time, but then was resolved by the company calling the shares.

If the original holders had not paid, but were now dead and the estate wound up, there would be no way to get those shares paid up.

I think the current share 'holders' are liable to pay the unpaid share capital. If there is a SPA that deals with it (ie, the current shareholders have a claim against the original holders) then so much the better but if its been overlooked then that's bad luck on the current shareholders.

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Replying to thevaliant:
Hallerud at Easter
By DJKL
02nd Mar 2021 10:09

The liability for a call lies with the party holding the shares when the call is made (resolution date of directors), at that juncture the individual becomes a debtor of the company.

If shares are transferred partly paid and with no extant calls still unpaid any subsequent calls fall on the new shareholder, effectively he bought partly paid shares and the price he paid ought to have reflected that fact.

The form J10 is used for the transfer of partly paid shares, as opposed to the J30 for fully paid shares, the transferee also signs the J110 form acknowledging their liability for the uncalled part of the original cost.

https://www.informdirect.co.uk/shares/transfer-shares-step-by-step-guide/

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Replying to DJKL:
Flag of the Soviet Union
By thevaliant
02nd Mar 2021 10:26

I happily admit to being a bit thick here, with the use of the words, "extant calls still unpaid"

So what happens if, at incorporation, £100k is issued, and the FULL £100k is called for, but not paid? Ie, the company can't 'call' for any more, as its called in full, but it remains unpaid.

Is the resultant debtor tied to the original shareholder, or the new one should those shares be transferred? I can see problems if its the former.

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Replying to thevaliant:
Hallerud at Easter
By DJKL
02nd Mar 2021 11:51

Given the call has been made the liability is likely that of the original shareholder, his name at that juncture is in the company's books as a debtor.

See section 8 re Liens and section 12 re calls and liability post transfer

Typical Articles, Tables A

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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By Tax Dragon
02nd Feb 2021 06:30

Just checking, OP, that you know the difference between authorised and issued.

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Replying to Tax Dragon:
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By Prestige Bookkeeping
02nd Feb 2021 09:45

Yes I do

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Replying to Prestige Bookkeeping:
Psycho
By Wilson Philips
02nd Feb 2021 10:49

And do you understand the difference between unpaid (but not called up) and called up (but not settled)? If you do, the answer to your question, which answer has already been given, should be obvious.

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By Tax Dragon
02nd Feb 2021 10:24

£1 makes more sense than the £500,000 you said initially.

Good luck to them getting the £100,000 from the seller. Even if they do, it will be by virtue of legal action. (Oh, there's that word again.)

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Replying to Tax Dragon:
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By Prestige Bookkeeping
02nd Feb 2021 10:40

No, the investor bought around 10,000 shares for £50,000 in 2018, therefore £5 per share.

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Replying to Prestige Bookkeeping:
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By Tax Dragon
02nd Feb 2021 10:51

It's OK, everyone knows I abstain from threads when dogs are involved (shaggy or otherwise).

I hadn't realised this was one of those. I retract everything I said (while, curiously, also standing by it - the retraction is on principle).

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By Prestige Bookkeeping
02nd Mar 2021 00:57

Thank you all for your help

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RLI
By lionofludesch
02nd Mar 2021 10:06

If the shares are called upon and the shareholder doesn't pay up, the company can make them forfeit.

Subject to anything contrary in the Articles.

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