Issue of share

The nominal value of shares and their market value

A share has been defined as:

‘the interest of the shareholder in the company measured by a sum of money, for the purposes of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders’. (Borland’s Trustees v Steel (1901)). The word ‘capital’ is used in a number of different ways in relation to shares:

(a) Authorized capital - The statement of capital and initial shareholdings

This is the figure stated in the company’s memorandum of association. It sets the maximum number of shares that the company can issue together with the value of each share. A company’s authorized capital can be increased by passing an ordinary resolution. There is no requirement that companies issue shares to the full extent of their authorized capital.

The statement of capital and initial shareholdings is essentially a ‘snapshot’ of a company's share capital at the point of registration.

Section 10 CA 2006 requires the statement of capital and initial shareholdings to contain the following information:– the total number of shares of the company to be taken on formation by the subscribers to the memorandum;– the aggregate nominal value of those shares;– for each class of shares: prescribed particulars of the rights attached to those shares, the total number of shares of that class and the aggregate nominal value of shares of that class; and– the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the shares or by way of premium).

The statement must contain such information as may be required to identify the subscribers to the memorandum of association. With regard to such subscribers it must state:– the number, nominal value (of each share) and class of shares to be taken by them on formation; and– the amount to be paid up and the amount (if any) to be unpaid on each share.

Where a subscriber takes shares of more than one class of share, the above information is required for each class.

(b) Issued capital represents the nominal value of the shares actually issued by the company. It is more important than authorized capital as a true measure of the substance of the company. If a company is willing to pay the registration fee it can register with an authorized capital of £1 million yet only actually issue two £1 shares. Public companies must have a minimum issued capital of £50,000 (s.11 CA 1985).

(c) Paid-up capital.This is the proportion of the nominal value of the issued capital actually paid by the shareholder (s.547 CA 2006). It may be the full nominal value, in which case it fulfils the shareholder’s responsibility to outsiders; or it can be a mere part payment, in which case the company has an outstanding claim against the shareholder. Shares in public companies must be paid up to the extent of at least a quarter of their nominal value (s.586 CA 2006).

(d) nominal value and market valueOnce established, the nominal value of the share remains fixed and does not normally change. However, the value of the shares in the stock market may be subject to daily fluctuation depending on a number of interrelated factors, such as the profitability of the company, the prevailing rate of

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interest or prospective take over bids. Thus the market value of a share of £1 nominal value may as much as £5 or higher, or as low as 1 penny.

ALTERATION OF SHARE CAPITALThe company may by ordinary resolution:(a) Increase – increase its share capital by new shares of such amount as the resolution prescribes;(b) consolidation - consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;(c) sub-division - subject to the provisions of the Act, sub-divide its shares, or any of them, into shares of smaller amount and the resolution may determine that, as between the shares resulting from the sub-division, any of them may have any preference or advantage as compared with the others; (d) Conversion – Fully paid shares may be converted into stock & vice versa; and(e) Cancellation - cancel shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled.

Reduction of capital - maintenance of capital - The doctrine of capital maintenance

As shareholders in limited companies, by definition, have the significant protection of limited liability the courts have always seen it as the duty of the law to ensure that this privilege is not abused at the expense of the company’s creditors. To that end they developed the doctrine of capital maintenance, the specific rules of which are now given expression in the Companies Act (CA) 2006. The rules, such as that stated in CA 2006 s.580 against shares being issued at a discount, ensure that companies receive at least the full nominal value of their share capital. The rules relating to the doctrine of capital maintenance operate in conjunction to those rules to ensure that the capital can only be used in limited ways. Whilst this may be seen essentially as a means of protecting the company’s creditors, it also protects the shareholders themselves from the depredation of the company’s capital.

There are two key aspects of the doctrine of capital maintenance: firstly that creditors have a right to see that the capital is not dissipated unlawfully; and secondly that the members must not have the capital returned to them surreptitiously. There are a number of specific controls over how companies can use their capital

In relation to company law explain the procedure that must be followed in order for a company to reduce its issued capital.

The procedures through which a company can reduce its capital are laid down by ss.641–653 Companies Act 2006.Furthermore, in general, a company may not purchase its own shares or give financial assistance for the acquisition of its own shares. However, there are a number of exceptions to the principle:a) The company may reduce its share capital (s. 135).b) The company may in appropriate circumstances, purchase or redeem its shares.c) In other circumstances, a court may order that a company buys its own shares, for example:(i) under s. 459 on an allegation of unfair prejudice to minority members;(ii) under s. 5 on an objection to an alteration of the company’s Articles;(iii) under s. 54 following an objection by a shareholder when a public company is re-registered as private.

By s. 135, a company may reduce its share capital in any way provided three requirements are met:

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1 It is done by special resolution.2 Its Articles permit (Table A,Article 34).3 The court confirms the reduction (s. 135(1)).

Section 641 states that, subject to any provision in the articles to the contrary, a company may reduce its capital in any way by passing a special resolution to that effect. In the case of a public company any such resolution must be confirmed by the court. In the case of a private company, however, it is also possible to reduce capital without court approval as long as the directors issue a statement as to the company’s present and continued solvency for the following 12 months (ss.642 & 643). The special resolution, a copy of the solvency statement, a statement of compliance by the directors confirming that the solvency statement was made not more than 15 days before the date on which the resolution was passed, and a statement of capital must be delivered to the registrar within 15 days of the date of passing the special resolution.

Section 641 sets out three particular ways in which the capital can be reduced by:

(a) removing or reducing liability for any capital remaining as yet unpaid. In effect the company is deciding that it will not need to call on that unpaid capital in the future.(b) cancelling any paid up capital which has been lost through trading or is unrepresented by in the current assets. This effectively brings the balance sheet into balance at a lower level by reducing the capital liabilities in recognition of a loss of assets. Thus suppose a company had losses on its balance sheet as follows:

Shares £20,000,000 Assets £15,000,000Losses £5,000,000

£20,000,000 £20,000,000

This company would be unable to pay a dividend until it had cleared the losses from the balance sheet. A balance sheet carrying such losses would deter future investors and because of the requirement to make good accumulated losses it could be some years before dividends could be paid. If it were to write off some of share capital to represent the true asset position, the company might have reduced its capital but could instead start paying dividends again, once it made profits.It could use s. 135 for this purpose. Following the procedures therein it could cancel one share in four. The balance sheet would then read as follows:

Shares £15,000,000 Assets £15,000,000The members would have one quarter less shares than before the reduction but their proportionate stake in the company would, of course, be exactly the same. All that has happened is that by a cosmetic device the losses have been cleared from the balance sheet.

(c) repayment to members of some part of the paid-up value of their shares in excess of the company’s requirements. This means that the company actually returns some of its capital to its members on the basis that it does not actually need that level of capitalisation to carry on its business.

It can be seen that procedure (a) reduces the potential creditor fund, for the company gives up the right to make future calls against its shares and procedure (c) reduces the actual creditor fund by returning some of its capital to the members. In recognition of this fact, creditors are given the right to object to any such reduction. However procedure (b) does not actually reduce the creditor fund, it merely recognises the fact that capital has been lost. Consequently creditors are not given the right to object to this type of alteration (ss.645 & 646).

Under s.648 the court may make an order confirming the reduction of capital on such terms as it thinks fit. In reaching its decision the court is required to consider the position of creditors of the company in cases (a) and (c) above and may do so in any other case. The court also takes into account the interests of the general public. In any case the court has a general discretion as to what should be done. If the company has more than one class of shares, the court will also consider whether the reduction is fair between classes. In this it will have regard to the rights of the different classes in a liquidation of the company since a reduction of capital is by its nature similar to a partial liquidation.

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When a copy of the court order together with a statement of capital is delivered to the registrar of companies a certificate of registration is issued (s.649).

Under what circumstances may redeemable shares be redeemed by the company?_ The redemption must be permitted by the Articles._ The company must also have issued unredeemable shares._ The shares to be redeemed must be fully paid._ The shares must be redeemed either out of distributable profits of the company or out of the proceeds of a fresh issue of shares made for the purpose of the redemption. _ Any premium payable on redemption must be paid out of distributable profits or, in certain circumstances, out of share premium account.

Dividend - how dividends may be properly funded; the rules which apply to public limited companies; and the consequences of any dividend being paid in

breach of those rules.

Funding: Dividends are the return received by shareholders in respect of their investment in a company. Subject to any restriction in the memorandum of association, every company has the implied power to apply its profits in the distribution of dividend payments to its shareholders. Although the directors recommend the level of dividend payment, it is for the company in a general meeting to declare the dividend. This is one of the items conducted at the annual general meeting. If the directors decline to recommend a dividend then it is not open to the general meeting to overrule that decision and declare a dividend.

The long standing common law rule is that dividends must not be paid out of capital (Flitcroft’s case 1882). The current rules relating to the payment of dividends was introduced by the Companies Act 1980, now the Companies Act 1985. These rules represent a considerable strengthening of the previous situation, which was notoriously lax in the way in which dividend payments could be determined. The present Act governs, and imposes restrictions on distributions made by all companies, both public and private. Section 263 defines distribution as any payment, cash or otherwise, of a company’s assets to itsmembers, except for the categories stated in the section, which include the issue of bonus shares, the redemption of shares, authorised reductions of share capital, and the distribution of assets on winding up. Section 263 also provides the basic condition for distribution applying to all companies, which, in essence, is that they must have profits available for that purpose. This term is defined as accumulated realised profits less accumulated realised losses, with profit or loss being either revenue or capital in origin. It is important to note that the use of the term accumulated means that any previous years’ losses must be included in determining the distributable surplus, and that the requirement that profits be realised prevents payment from purely paper profit resulting from the mere revaluation of assets. Section 275 provides that all losses are to be treated as realised except where a general revaluation of all fixed assets has taken place.

Rules for PLC: As has been stated, the foregoing realised profits test applies to both private and public companies, but public companies face an additional test in relation to distributions, in that s.264 requires that any distribution must not reduce the value of the company’s net assets below the aggregate of its total called up share capital plus any undistributable reserves. The effect of this rule is that public companies have to account for changes in the value of their fixed assets, and are required to apply an essentially balance-sheet approach to the determination of profits.

Consequences of breach: Under the rule in Flitcroft’s case any directors of a company who breached the distribution rules, and knowingly paid dividends out of capital, were held jointly and severally liable to the company to replace any such payments made. The fact that the shareholders might have approved the distribution did not validate the illegal payment (Aveling Barford Ltd v Perion Ltd (1989)). Also at common law shareholders who knowingly received, or ought to have

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known that they had received an unlawful dividend payment were required to repay the money received or to indemnify the directors for payments they might have already been required to have made (Moxham v Grant (1900)). Section 277 of the Companies Act 1985 restates the common law rule, providing that shareholders, who either know or have reasonable grounds for knowing that any dividend was paid from capital, shall be liable to repay any such money received to the company.

’Class rights’ and shares and how rights can be altered.

It is usual for class rights to attach to particular shares and for those rights to be transferred with the shares to which they are attached. The specific rights may be set out in the memorandum of association, although it is more usual for such rights to be provided for in the articles of association. It is now recognized, however, that such class rights may be created by external agreements and may be conferred upon a person in the capacity of shareholder of a company, although not attached to any particular shares. In practice, class rights are usually concerned with one or more of the following:1 right to dividends;2 right to return of capital;3 right to participate in surplus assets on a winding up;4 right to attend and vote at meetings.Thus in Cumbrian Newspapers Group Ltd v Cumbernauld & Westmorland Herald Newspaper & Printing Co Ltd (1986), following a merger between the plaintiff and defendant companies, the defendant’s articles were altered so as to give the plaintiff certain rights of pre-emption and also the right to appoint a director, so long as it held at least 10% of the defendant’s ordinary shares. Scott J held that these rights were in the nature of class rights and could not be altered without going through the procedure for altering such rights.

As the Cumbrian case demonstrates, class rights become an issue when the company looks to alter them. As has been shown with regard to preference shares, class rights usually provide their holders with some distinct advantage or benefit not enjoyed by the holders of ordinary shares and that the class members are usually in a minority within the company. It can be appreciated, therefore, that the procedure for varying such rights requires some sensitivity towards the class members.

Alteration of class rights

The procedure for altering class rights are set out in ss.125–127 of the Companies Act 1985. The precise procedure depends upon two matters, firstly, where the rights are set out and secondly whether there is a pre-established procedure for altering the rights.

(i) Where the original articles set out a procedure for varying class rights, then that procedure should be followed, even if the rights are provided by the memorandum (s.125(4)).

(ii) Where the rights are attached to a class of shares otherwise than by the memorandum, i.e. by the articles or an external contract, and there is no pre-established procedure for altering them, then the consent of a three-quarters majority of nominal value of the shares in that class is necessary. The majority may be acquired in writing or by passing a special resolution at aseparate meeting of the holders of the shares in question. This is the most common way of attaching and varying class rights (s.125(2)).

(iii) Where the articles are attached by the memorandum and there is no pre-established procedure for alteration, then the consent of all members of the company is required to alter the rights (s.125(5)). Any alteration of class rights under s.125 is subject to challenge in the courts. To raise such a challenge any objectors must:(a) hold no less than 15% of the issued shares in the class in question (s.127(2));(b) not have voted in favor of the alteration (s.127)); and(c) apply to the court within 21 days of the consent being given to the alteration (s.127(3)).

The court has the power to either confirm the alteration or to cancel it as unfairly prejudicial.

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In Greenhalgh v Arderne Cinemas (1946) it was held that the subdivision of 50 pence shares which had previously carried one vote each, into five 10 pence shares which each carried one vote, did not vary the rights of another class of shares. Note that although strictly speaking such an alteration did not affect the rights held by the other shares, it did alter their real voting power.Also in House of Fraser plc v ACGE Investments Ltd (1987) it was held that the return of all the capital held in the form of preference shares amounted to a total extinction of right. It could not therefore be seen as a variation of those rights and the s.125 procedure did not have to be followed.

Pre-emption rights

As well as ensuring that they have this authority, the directors must also observe the constraints imposed upon them by CA 1985, s. 89. By this, any company, whether public or private, which is proposing to allot shares in return for cash, must offer them first to its existing shareholders before offering them to any other persons. This is known as a pre-emption right or a preferential right. Existing shareholders are given the opportunity to acquire any newly available shares before those shares are offered to any new shareholders. This means that the existing shareholders may, if they wish, maintain their voting power and share of control of the company. Shareholders are not obliged to exercise their right of pre-emption and may instead waive their pre-emption right.

Disapplication of pre-emption rights

There are five sets of circumstances where pre-emption rights do not apply:1 Pre-emption rights only apply to equity rights. These are shares having a right to participate in the surplus profits of the company. Thus pre-emption rights apply only to the holders of ordinary shares and not to the holders of preference shares (CA 1985, s. 94(5)(a)).2 Where shares are being issued under an employee share scheme (CA 1985, s. 89(4), (5) and s. 94(4) (5) (a)). (These are extensively examined in the Company Secretarial Practice module.)3 Under s. 91 where the Memorandum or Articles of a private company contain a provision expressly and clearly excluding the pre-emption rights.4 Where the members pass a special resolution for the pre-emption rights not to apply (as specified above) (CA 1985, s. 95(1), (2)).5 Where the shares to which the allotment relates are being paid up wholly or partly by non-cash consideration(CA 1985, s. 89(4)). This means that where shares are being allotted in exchange for assets being transferred to the company, pre-emption rights do not apply.

The procedures relating to the issuing of shares to the public and the rules relating the payment for shares issued.

Public subscription - It is illegal for a private company to offer its shares for subscription to the public. Public subscription can be done by Public Companies.

How to offer public subscription.

(i) Direct invitations to the publicLarge companies may attract sufficient subscription from the public by issuing a prospectus and inviting subscription for shares directly. To ensure that the issue of shares is a success and that all shares are sold, the company will usually arrange underwriting. This is an agreement with the Issuing House that it undertakes to subscribe for all the shares that are not otherwise sold.

(ii) Offer for saleAn offer to the public may be made in an indirect way by selling the shares directly to an issuing house who will resell the shares to the public by issuing a prospectus and inviting applications. The public will have confidence in the reliability of the investment since the issuing house would not undertake direct responsibility for the issue if the shares were not sound.

(iii) Placing

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A company may place with an issuing house, either for it to buy and resell to selected clients or to act as the company’s agent in finding clients to subscribe for the shares. Such issues do not usually, therefore, take the effect as issues to public at large.

Prospectus

Generally speaking prospectuses are documents presented by companies seeking to issue new shares or debentures to the public. There are in fact two types of documents. Listing particulars is the term used in relation to shares that are to be listed on the Official List ofthe Stock Exchange, whereas the term prospectus refer to all other offers of shares to the public.Although the prospectus is referred to as an offer document, it is in strict legal terms only an invitation to treat, with the optative shareholders making the offer to take shares which the company can accept or reject. The document must contain prescribed information relating to the company, and there are both criminal and civil penalties for the provision of false information. All such documents must be lodged with the Registrar of Companies.Where companies offer shares to the public for the first time, without the intention of applying for an official listing on the Stock Exchange, then the appropriate legislative controls are to be found in the Public Offer of Securities Regulations (1995). Regulation 4 requires the publication of a prospectus, which must contain the information, or equivalent, set out in Schedule 1 to those regulations. In addition regulation 9 imposes a general duty of disclosure to provide such information as to enable potential shareholders to make ‘an informed assessment’ of the company and its shares.Where the shares being offered will be traded on the Official List of the Stock Exchange, then the prospectus document must comply with the Stock Exchange’s Listing Rules, otherwise known as the Yellow Book.

Share must bear a nominal monetary value, but it is possible for the company to require prospective subscribers to pay more than that nominal value. In such circumstances the shares are said to be issued at a premium, the premium being the value received over and above the nominal value of the shares. Section 130 of the Companies Act 1985 provides that any such premium received must be placed into a share premium account. The premium obtained is regarded as equivalent to capital and, as such, there are limitations on how the fund can be used. Section 130 provides that the share premium account can be used for the following purposes:

(i) to pay up bonus shares to be allotted as fully paid to members;(ii) to write off preliminary expenses of the company;(iii) to write off the expenses, commission or discount incurred in any issue of shares or debentures of the company;(iv) to pay for the premium payable on redemption of debentures.Issue and allotment of shares

In general the directors of a company must have the authority of the shareholders to allot shares. An unauthorized allotment is a criminal offence.No company can allot equity securities (ordinary shares) without first offering them pro rata to existing shareholders on the same or more favorable terms than it is proposing to offer them to them people.The prime purpose of an issue of shares is that the company is in need of further finance. Any other issue purpose is questionable:

Shares issued at a premium and The share premium account

It is possible, and not at all uncommon, for a company to require prospective subscribers to pay more than that nominal value of the shares they subscribe for. This is especially the case when the market value of the existing shares are trading at above the nominal value. In such circumstances the shares are said to be issued at a premium, the premium being the value received over and above the nominal value of the shares. Section 610 CA 2006 provides that any such premium received must be placed in a share premium account. The premium obtained is regarded as equivalent to capital and, as such, there are limitations on how the fund can be used. Section 610 provides that the share premium account can be used for the following limited purposes:

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_ to pay up unissued shares which are allotted to members as fully paid up bonus shares;_ to write off preliminary expenses of the company;_ to write off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;_ to provide for the premium payable on the redemption of debentures of the company;_ to pay off any premium on the redemption or purchase by companies of their own shares.

(i) to write off the expenses, commission or discount incurred in any issue of the shares in question;(ii) to pay up bonus shares to be allotted as fully paid to members.

Section 687 also allows for the share premium account to be used to finance the payment due for any premium due on the redemption of redeemable shares.

Applying the rules relating to capital maintenance, it follows that what the share premium account cannot be used for is to pay dividends to the shareholders.

The rules relating to share premiums apply whether the issue is for cash or otherwise and so a share premium account can arise where shares are issued in exchange for property which is worth more than the par value of the shares (Shearer v Bercain Ltd (1980)). In the light of that case, relief from the strict application of the rules relating to premium was introduced in the case of certain company group reconstructions (s.611 CA 2006) and company mergers (s.612 CA 2006).

Issuing shares at a discount

It is a long established rule that companies are not permitted to issue shares for a consideration that is less than the nominal value of the shares together with any premium due. The strictness of this rule may be seen in Ooregum Gold Mining Co of India v Roper (1892). In that case the shares in the company, although nominally £1, were trading at 12·5p. In an honest attempt to refinance the company, new £1 preference shares were issued and credited with 75p already paid (note the purchasers of the shares were actually paying twice the market value of the ordinary shares). When, however, the company subsequently went into insolvent liquidation, the holders of the new shares were required to pay a further 75p.

This common law rule is now given statutory effect in s.580 CA 2006. If a company does enter into a contract to issue shares at a discount it will not be able to enforce this against the proposed allottee. However, anyone who takes shares without paying the full value, plus any premium due, is liable to pay the amount of the discount as unpaid share capital, together with interest at 5% (s.580(2)/CA 2006). Also any subsequent holder of such a share who was aware of the original underpayment will be liable to make good the shortfall (s.588 CA 2006).

The reason for such rigour in relation to preventing the issue of shares at a discount is the protection of the company’s creditors. Shareholders were seen to enjoy the benefit of limited liability but that privilege was only extended to them on the basis that they fully subscribed to a company’s capital and in turn that capital was seen as a creditor fund against which they could claim in the event of a dispute.

In private companies it is possible to avoid the strict effect of this rule by exchanging shares for property that is overvalued (re Wragg (1897)). In public companies all such non-cash consideration has to be valued (s.593 CA 2006). Equally the effect of issuing shares at a discount may arise where the company pays underwriting commission under s.553 CA 2006 which permits a company, subject to authorisation in its articles and to disclosure, to issue shares at up to a 10% commission.

It should also be noted that the above only applies to shares. Debentures may be issued at a discount. This is the case even where they are convertible into shares, as long as they do not carry an immediate right to conversion (Mosely v Koffyfontein Mines (1904)).

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Redemption of sharesThe redemption must be permitted by the Articles._ The company must also have issued unredeemable shares._ The shares to be redeemed must be fully paid._ The shares must be redeemed either out of distributable profits of the company or out of the proceeds of a fresh issue of shares made for the purpose of the redemption._ Any premium payable on redemption must be paid out of distributable profits or, in certain circumstances, out of share premium account

Capital redemption reserve

This concept reflects the controls that apply where companies buy their own shares. Thus even where the company uses distributable profits to pay for the purchase of its own shares, it is required under s.170 CA to establish a capital redemption reserve, equivalent to the value of the profits so used, which must be maintained in the same way as other capital. Any amount allocated to the capital redemption reserve may be reduced by transfer to a share capital account through the issue of bonus shares but otherwise cannot be reduced without the company going through the formal capital reduction process, requiring the approval of the court.

The right of companies to buy back their own shares is provided for in ss.162 – 181 of the Companies act 1985. The most essential rule relating to public companies is that no purchase or redemption is to be financed from the company’s capital, and can only be paid from profits properly available for distribution to the company’s members (s.162 applying s.160 CA). Private companies, however, are permitted to use the company’s capital to finance the purchase of their own shares, although even here the controls established are extremely rigorous (ss.171 – 175).

Preference Shares and their rights

A company may only issue one class of shares giving the holders the same rights. However, it is possible, and quite common, for companies to issue shares with different rights. Thus, preference shares may have priority rights over ordinary shares with respect to dividends or the repayment of capital. Nor is it uncommon for shares to carry different voting rights. Each of these instances is an example of class rights and the holders of shares which provide such rights constitute distinct classes within the generality of shareholders.

The nature of specific class rights can be clearly seen with regard to preference shares. Such shareholders are usually given priority over ordinary shareholders in relation to:

(a) Payment of dividendA preference share generally confers the right to receive a dividend up to a specified amount before any dividend is paid on the ordinary shares. The rights of preference shares depend essentially on what is expressly provided in their terms of issue. However, preferential dividends are deemed to be cumulative unless expressly described as non-cumulative. This means that the preference shareholder will be entitled to arrears in dividend if not paid out in one year before any payment can be made to the ordinary shareholders by way of dividend. The preference shareholder is only entitled to receive a dividend out of available profits out of which the dividend is declared payable. The right to a preference dividend is exhaustive. Thus, if the preference dividend is paid in full there is no further right to dividend unless, once again, there is an express right to the contrary.

Preference shares carrying the right to participate equally with ordinary shares after the latter have received a dividend of a specified amount are called participating preference shares. If a company goes into liquidation with arrears outstanding on preference dividends, the right to receive arrears is lost unless the articles provide that the arrears shall be paid out of the assets available in winding up. They have no claim on any reserves, which could have been applied in paying their dividends.

(b) Return of capital on winding up of the company.

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Unless expressly so provided in winding up (or return of capital on reduction) preference shares do not have any priority over ordinary shares in return of capital. They then rank pari passu (equally) with ordinary shares in bearing their proportion of any deficiency of paid up capital. However, in practice preference shares are usually given priority in any return of capital, but that priority right is exhaustive i.e., they are entitled to be repaid capital as provided but not to participate in any surplus assets (Re Saltdean Estates) (1968)). Case: Saltdean EstatesFacts: The company had ordinary and preference shareholders having priority on return on capital. The company proposed to reduce capital (with the court’s permission under S135 CA85) by way of returning capital (i.e. nominal value) to them to eliminate the class

Held: The Preference shareholders had received what their class right entitled them to – repayment of nominal value before ordinary shareholders. They were not entitled to more.

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