share capital- participation in surplus

A lender is a creditor of the company so, when the debt is paid off (say, in a liquidation situation) that’s the end of the matter – the lender is entitled to no more money from the company

Continuing with the liquidation scenario, a liquidator will sell all the company’s assets and then use the proceeds to pay:

1 liquidator’s fees and expenses
2 lenders where the loan is secured by a fixed charge
3 preferential creditors such as unpaid wages
4 lenders where the loan is secured by a floating charge
5 unsecured creditors

At this stage, all the company’s liabilities will have been paid in full (hopefully!) and there’s still some money left for the liquidator to distribute. This remaining money will then be paid to:

6 preference shareholders – they get the full nominal value of their shares
7 equity shareholders – they too get the full nominal value of their shares

And that’s it. Everybody has been paid in full for the amounts owing to creditors and for the amounts invested by shareholders

But hang on! There’s still some money left over after everyone has been paid, so who gets that extra cash?

When EVERYONE has been paid IN FULL for the amounts owing to them, and there’s still ‘surplus assets’ (ie some more cash) those surplus assets are distributed to the equity shareholders

And that’s what is meant by ‘participating in surplus assets’ and you’ll note how the equity shareholders have this potential benefit whereas lenders are entitled only to the amount of their loan

There is, of course, the downside … if the liquidator can only realise the company’s assets for an amount less than the liabilities, the beneficiaries of the cash proceeds are as detailed above but each layer is paid in full before the next layer receives anything.

(That’s not strictly true because of the impact of ‘The Prescribed Part’, but it’s accurate enough to illustrate that, if there isn’t enough cash to pay all the classes above the equity shareholders in full, then the equity shareholders will lose out)

OK?

You’re very welcome