Question 1

In March, Utopia plc issued 2,500,000 £1 ordinary shares to Adam in consideration of the transfer to the company of four printing machines valued at £750,000 each and Adam’s services as a design consultant for one year valued at £50,000. The first machine was delivered when the shares were allotted, but the others are to be delivered over the next two years as Adam’s own printing business is run down. Adam transferred 500,000 of these shares to his wife, and 100,000 to each of his four children.

Advise on the legality of the share issue and the potential liability of the parties.

Answer guidance

The issues here relate to the allotment of shares by a public company for non-cash consideration (the machines and services) so you will need to consider in particular CA 2006, ss. 585-586, 588-590, 593-597. To add depth to your answer you could briefly reflect on the reasons for these detailed provisions and link to the doctrine of capital maintenance.

On undertakings to do work or perform services as consideration for allotment of shares (and the consequences of breach), you should consider CA 2006, s. 585. You should also consider s. 586 as three of the machines are also to be transferred later, so the company has not allotted shares for at least one-quarter of their value plus premium.  You will need to spend some time considering the valuation of non-cash consideration: ss 593-597. Explain what is required and what needs to be done with the report, and the consequences of breach.

As well as explaining A’s liability, you need to consider the liability of A’s wife and children as subsequent holders of the shares. The provisions discussed create joint and several liability (with A) unless they are purchasers for value without notice. Make sure you consider the possibility of relief for A and/or his wife and children: s. 589, s. 606. Consider cases such as Re Ossory Estates plc [1988] BCLC 213 to decide if relief would be granted. Remember too to reflect on the liability of the company and officers in default: s. 590, s. 607.

Question 2

The rules relating to maintenance of capital of a limited liability company with a share capital are designed to protect the company’s creditors for whom the company’s capital is a guarantee fund. In this context, analyse the function of the law relating to—

(a) the role of the capital redemption reserve in the redemption or purchase by a company of its own shares, and

(b) controls on the payment of dividends for public and private companies.

Answer guidance

This question relates to the capital maintenance doctrine, looking in particular at the acquisition of a company’s own shares and the payment of dividends, and how far these are consistent with the doctrine and its aims.

Explain the capital maintenance doctrine, and how this restricted companies in buying their own shares (Trevor v Whitworth (1887) 12 App Cas 409) and paying dividends (Re Exchange Banking Co, Flitcroft’s Case (1882) 21 Ch D 519). You should reflect that the common law restrictions on dividends had many holes, see eg  Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1, Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch 353. But don’t spend too much time explaining the common law – focus on the current law, now contained in CA 2006, which provides more flexibility in the purchase of a company’s own shares, and more stringent controls on payment of dividends.

With regard to the purchase or redemption of a company’s own shares, consider how the regulations provide more flexibility to companies, while seeking to maintain creditor protection. In this context explain the funding of a purchase/redemption (remembering the differences between public and private companies) and the function of the capital redemption reserve (CA 2006, s. 733) in respecting the capital maintenance rules. You should also explain the ability of companies to hold treasury shares and the limits on this: CA 2006, ss. 724-732.

For distributions, consider and explain CA 2006, s. 830(1) and the additional requirements for public companies: CA 2006, s. 831(1).  Reflect on the consequences of an unlawful distribution, including the potential liability of shareholders: s. 847(2).