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Hi Mike,
Can you please help me understand what is the difference between Task 2 and Task 3? Apologies for the very long text in advance. It’s from the BPP exam practice book 18.2.
I understand that shares can be issued at a premium to their nominal value but not at a discount to it. To me, Gus was issued $10,000 shares at a 25% discounted price initially (75 cents per share) and issued another $10,000 shares at a 60% discounted price (40 cents per share). I’m confused why these two are treated differently.
18.2
Flop Co was in financial difficulties. In January, in order to raise capital, it issued 10,000 $1 shares to Gus, but only asked him to pay 75 cents per share at the time of issue.
In June, the company realised that it needed even more money, and in order to persuade Gus to provide it, Flop Co told him that if he bought a further 10,000 shares he would only have to pay a total of 40 cents for each $1 share.
Gus agreed to this, but the injection of cash did not save Flop Co and in December it went into insolvent liquidation, owing a considerable amount of money.Task 2
What is the extent of Gus’s liability on the 10,000 $1 shares that he paid 75c each for?
•Nothing
•$2,500 (the amount of Gus’s unpaid share capital)
• $7,500 (the amount of share capital paid by Gus)
• $10,000 (the amount of share capital issued to Gus)The correct answer is: $2,500 (the amount of Gus’s unpaid share capital)
Under the Companies Act, Flop Ltd had a remaining call on Gus after the first issue for the amount left unpaid on his shares of (10,000 × 25c = $2,500).Task 3
What is the extent of Gus’s liability on the further 10,000 $t shares that he paid 40c each for?
• Nothing
• $4,000 (the amount Gus paid for the shares) plus interest
• $6,000 (the amount unpaid on Gus’s shares) plus interest
• $6,000 (the amount unpaid on Gus’s shares) onlyThe correct answer is: $6,000 (the amount unpaid on Gus’s shares) plus interest
Flop Co is trying to issue shares at a 60c discount to their nominal value. This is disallowed under the Companies Act and Gus is liable for the balance (10,000 × 60c = £6,000) plus interest.Thank you!
Here we go! Home at last 🙂
Sujin, I have copied Section 580 of Companies Act 2006. I think that this should help particularly the last 6 words of S580 (2)
“580 Shares not to be allotted at a discount
(1) A company’s shares must not be allotted at a discount.
(2) If shares are allotted in contravention of this section, the allottee is liable to pay the company an amount equal to the amount of the discount, with interest at the appropriate rate.”
OK now?
This second issue of shares is different from the first issue. In that first issue, Gus was always liable to pay the uncalled amount. However, in the second issue, the directors informed Gus that the total amount payable for each share would be 40c.
Issue 1 was an issue of $1 shares, 75c paid (and a further 25c payable when the directors called up that 25c balance)
Issue 2 is clearly an issue at a discount (” ….. he would only have to pay a total of 40 cents for each $1 share.”) and the balance of 60c is now payable together with interest at the appropriate rate as per Section 580
All clear?
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