Chapter 10 – COMPANY LAW

Q1. What does it really mean when it says a public company is limited by shares?

Hi Marcia. The expression ‘the company’ is, I believe, an abbreviation for ‘the company of members’. This latter expression suggests that what we have is an aggregation of people that wish to have some direct or indirect involvement in the affairs of an enterprise that is created, typically, to generate some wealth. That wealth is then scheduled to be paid, piecemeal by way of dividends, to those people that expressed their interest in being participant.

A ‘company’ as we know it, under English company law, is an artificial entity that exists free from any entanglement of those people that expressed their interest and free also from any entanglement from those people that are appointed to oversee the running of this artificial entity.

OK so far? Now, how to measure the different ranges of interest that these participants could hold and how to determine the level of liability of those people in the event that the artificial entity is unsuccessful and fails in a glorious insolvent liquidation? The answer is relatively straight forward. The different levels of interest are measured by the allocation / acquisition of shares in the company ( a ‘share’ being a bundle of rights that entitle the holder to exercise those rights eg attend general meetings, vote on resolutions, receive dividends). Just because I own 50 shares in a company does not mean that all the shareholders should hold 50 shares too.

But what about the allocation / sharing of liability attributable to these people in the event of an insolvent liquidation? And here is where the expression ‘limited by shares’ comes in. In the event that a company is no longer able to continue in operational existence because of its financial position, there is the question about the potential for the participants (the shareholders) being required to contribute to that financial deficit. But the liability of those shareholders (technically, those members) is limited, primarily by the number of shares that they individually hold but then, secondly, by the amount of the face value of those shares that has not been credited as fully paid.

A clause in a company’s constitution will typically read (and I NEVER saw an exception to this typical wording) ‘The liability of the members is limited to the amount, if any, as yet unpaid on shares held by them’

So if a company has a share capital of £100,000 divided into 100,000 shares of £1 each and those shares have been issued and credited as 70 pence paid, then the potential liability for each individual member is calculated as ‘the number of shares held multiplied by (£1 – 70 pence)’ So, a holder of 3,000 shares would face a potential liability to contribute to the deficiency of assets to the tune of £900 (3,000 x 30p)

Q2. Why can’t a public company be an unlimited liability company?

A very, VERY simple answer to this! By statutory definition, a public company is a company that has at least 2 members, is limited by shares, the name of the company shall end in ‘public limited company’ or an acknowledged abbreviation of such, has an issued share capital of not less that £50,000 of which not less than one quarter is credited as paid up together with the whole of any share premium.

So, statutory definition prevents the possibility of a public company having unlimited liability

OK?