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What exactly does limited by shares, and limited by guarantee mean?
My presumption is that there is a limit on the liability based on the amount of shares the shareholder has, and the amount of funding the person has guaranteed?
Thank you sir
The word ‘limited’ in a company’s name tells us that the liability of the MEMBERS is limited
Even though we call the entity a limited company, the liability of the separate entity company is unlimited
But, in a liquidation situation, a liquidator will be unable to ask successfully for contributions from the members … because their liability is limited
The extent of that limitation isdifferent in the two situations of being limited by shares and limited by guarantee
In a situation where the members’ liability is limited by shares, the extent is ‘to the amounts, if any, as yet unpaid on shares held by them’
So where we have a company facing an insolvent liquidation with net liabilities of, say, $500,000 and we have issued share capital of $1,000,000 shares of $1 each, 70 cents paid, a liquidation can ask the shareholders to pay in those 1,000,000 shares’ worth of 30 cents (the amounts as yet unpaid on shares held by them)
That will raise $300,000 to help to pay off that $500,000 deficit
But that’s all! The liquidator cannot demand a further $200,000 to cover the shortfall … because the members’ liability is limited ‘to the amounts, if any, as yet unpaid on shares held by them’
Where a company is limited by guarantee, the situation is similar in that the liability of the members is limited and a liquidator can only successfully ask members for that amount of money that each of those members has guaranteed to pay into the company in the event of an insolvent liquidation
Typically in practice (because most companies limited by guarantee in England tend to be small entities) members will have guaranteed to pay into the company an amount of £1
OK?
How can you have shares when you haven’t fully paid for them?
I thought the whole point of raising finance through issuing shares was that the company can receive the proceeds from the issue price of the shares – so if they issued 400,000 of $0.7 shares at $2, then they make a proceed of issuing shares of $800,000?
Is it not an automatic transaction? Do shareholders have like a credit period???
Thank you sir
A company’s share capital may be made up of a number of different classes of share, each separate class having their own rights.
But, more often than not, there is just one class of share issued by a company
Typically this would be a share designated as Ordinary Shares of £1 each nominal value
In the days before the most recent Companies Act, each company had to disclose (at the time of registration as a company) the amount of share capital that was Authorised – say 3 million pounds sub-divided into 3 million ordinary shares of £1 each nominal value
But the company doesn’t have to issue those shares all in one event.
It could, for example, choose to issue just 1 million shares to begin with and leave the other 2 million in abeyance until the directors decided at a later date to raise some more finance
Furthermore, that 1 million that I’ve just suggested could be issued could be issued as ‘partly paid’ – say 70 pence paid
So, following the issue, the company will have received 1 million x 70 pence = £700,000
The remaining 30 pence is known as a ‘reserve liability’ and the shareholders will have to pay those 30 pences when the directors choose to call up that remaining amount
In answer to your question, no, it’s not an automatic transaction
In further answer to your question, it’s a sort of credit period except that it could be the case that the directors NEVER call up that remaining 30 pence
When British Telecom was privatised by Prime Minister Margaret Thatcher, the terms of issue were that lucky applicants would have to pay 50 pence on application followed by 40 pence on hearing that their application had been successful followed by a further 40 pence in one year’s time
So, in that case, the £1 shares were issued for £1.30 ( a premium of 30 pence) and the successful applicants WERE given a credit period of 1 year
OK?
Ok so whether it is a partly paid issue and when all of it is paid back is under the discretion of the director?
Also, the class of the shares is determined by its nominal value or the fact that it says ordinary or preference shares?
On a side note,
3. if the max expirary date for authority to allot shares is 5 years, then does that mean after 5 years the directors would have to amend the articles? if they choose to gain authority to issue shares via the articles instead of an ordinary resolution?
Thank you sir
“Ok so whether it is a partly paid issue and when all of it is paid back is under the discretion of the director?” Yes (probably “directorS”)
“Also, the class of the shares is determined by its nominal value or the fact that it says ordinary or preference shares?” Determined by the promoter acting under the direction of the client
“3. if the max expirary date for authority to allot shares is 5 years, then does that mean after 5 years the directors would have to amend the articles?” No, they would simply seek authority at the Annual General Meeting prior to the 5 year anniversary. In practice, the five years tends to be renewed each year so never gets below 4 years and never above 5 years
“if they choose to gain authority to issue shares via the articles instead of an ordinary resolution?” – authority must be granted and cannot exceed 5 years whether that authority is initially through the Articles or not
OK
So the granted authority to issue shares cannot exceed 5 years, but usually it is and can be renewed via an ordinary resolution in an annual general meeting such that although the granted years at any given time cannot exceed 5 years, in practice it is actually longer than 5 years because it is keep on renewed?
Thank you sir
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