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29 Dec

COMPANY LAW 1.13 COMPANY CAPITAL (BRIEF OVERVIEW AND AMENDMENT)

COMPANY CAPITAL.

Capital has been defined as money that can be used to produce further wealth[1] Capital is the net-worth of a business[2]. The company needs funds to further the purpose for which it was incorporated. Capital/property may be tangible[3], intangible[4], fixed[5] or circulating[6] or moveable. These demarcations are not water-tight.

For this topic, our main aim is to “put a monetary value” on all such properties. This monetary value represents the “company capital”.

Capital can be viewed from 2 perspectives.

  • The General Perspective: That capital is the net-worth of the business-Prof Abugu. Under the general perspective, capital could either be fixed or floating. See Section 567 CAMA.
  • The Restricted/Narrow Perspective: Look at capital as the value of assets contributed by the shareholders and subscribers of the company. Prof Gower holds this view.

Advantages/Importance of Capital to a Company.
1. It determines the safety and soundness of a company.

  1. Serves as an assurance to the shareholders and the general public that the vehicle (company) is worthy and can be trusted for investment. E.g. If you hear that UBA is going bankrupt, you would most likely go and withdraw all your money before it becomes too late.
  2. Protection of Creditors: If the co runs out of capital, it may be liquidated. This has a devastating effect on the creditors.
  3. Capital protects from financial distress: financial distress occurs where a co is unable to honour its obligations. When a co is in distress, the value of its assets starts dropping, employees start leaving… it is just important for a company to have capital.
  4. Market efficiency: In a market, we have the buyers and sellers. The market is influenced by the forces of demand and supply. Efficiency on the other hand is receiving the most satisfaction from the available resources. When the company does not have enough resources to carry out its endeavours or to purchase from the market, this is a great issue.

In the corporate legal world, the following are the types of capital: (there are other types of capital)

Nominal/Authorized Share Capital: The company registers with this capital. Section 27(2) CAMA[7] requires a minimum of 10,000 and 500,000 for private and public companies respectively. Various other acts specify various other minimum capital requirements like the CBN Act (100billion), Banking (25Billion), SECAct NICOMAct, Insurance Act (5 Billion) and so on.

Issued Capital: The part of the Authorised Capital that has been offered to shareholders/the public. CAMA requires at least 25 percent to be taken up-Section 27(2)(b). The rest (the ones not taken) is referred to as unissued[8]. Section 117 authorizes the company to issue shares. Capital can be issued at par[9], issued at a premium[10] or at a discount.[11] The part of the issued capital that has been taken by public/shareholders who have (at least) agreed to pay is called Subscribed Capital. When the Company asks them to pay, it is Called-up Capital.

Paid-Up Capital: the part of the issued capital that has actually been paid for by the people that subscribed to it. The part that has not been paid for referred to as uncalled capital.

Reserve Capital: This is the part of the capital reserved for the purpose of meeting creditor’s claims or for other exceptional circumstances- Re May Fair Property Co Ltd[12]. See Section 134[13], also.

Reserve Fund: The fund containing the money set aside (before distributing dividends) from the profits of any year to cater for emergencies or to plough back into the business. See Section 383(1) CAMA.

Share Premium Account: is the amount received by a company over and above the face value of its shares. The share premium account balances the difference between the par value of a company’s shares and the amount that the company actually received for newly issued shares. Suppose a company issues a 100 shares of #1 each, but the shares are bought for #3 per share. It then has #200 premium share capital[14].

Alteration of Share Capital Clause: Section 45 (4) and 100-111). By ordinary resolution[15] and notification to CAC within one month.

: For increase; Board resolution for increase, then in duly convened GM where Ordinary resolution to this effect is passed and notify CAC[16] within 15 days of passing the resolution.

The following should be attached; – A printed copy of the resolution should be attached. – Statutory declaration verifying (that at least 25 percent of the shares have been paid up at least 6 months before delivering the notice of increase).

Ad valorem Stamp duties would be paid on new shares. Copy of resolution and Certificate of Increase should be annexed to MEMOASS.

: For Reduction 106: reduction may be done to protect creditors, third parties and maintain capital. Articles of association must allow reduction and it should not be below the statutory minimum.

Procedure is that: – Directors have resolution that share capital be reduced, – board prepares proposed scheme of reduction, – duly convened GM (with notice explaining the reduction), – pass special resolution approving the scheme, then order of the court confirming the reduction and minutes of meeting of reduction. Both delivered to CAC and certificate of such registration obtained. The approved minutes and order of reduction are to be annexed to the MEMO.

 

[1] Microsoft Encarta Dictionaries 2009. 1993-2008 Microsoft Corporation.

[2] That is the assets minus liabilities. If XYZ and Co has a total asset of #2 billion and it owes BIT Ltd #1 Billion, the net worth of XYZ is 1billion. i.e. 2 billion – 1 billion.

[3] Tangible meaning we can feel and touch.

[4] Like Copyrights, Patents, Shares, and other choses in action.

[5] Real property like Land, Houses, Huge Stationary machinery or plant used to produce income or profit. Section 650 provides a similar definition of fixed capital.

[6] Changes from time to time in the course of business. E.g. Raw Materials.

[7] Sections 50, 52 and 99 CAMA.

[8] Authorised minus issued capital.

[9] capital issued at the face value 1 Naira.

[10] A company that is doing well may decide to issue capital at an increased face value. E.g. 3 Naira. It is authorised under Section 120 of CAMA to do this. Provided, the Co has the authorisatio to do so. The amount from the share premium should be created and the money derived from the issue at a premium should be kept there and not be tampered with.

[11] Section 121 when the company is not doing so well they can issue their capital at a value lower than the face value. From the Section, the co must at a meeting pass a resolution as to the rate of the value… the resolution passed at the general meeting is then sanctioned by the court.

[12] [1898] 2 Ch. 28.

[13] A company limited by shares may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called up except in the event and for the purposes of the company being wound up; and thereupon that portion of its share capital shall not be capable of being called up, except in the event and for the purposes specified in this section

[14] 100 multiplied by 1 (each share is #1) = 100. But if it is paid #3, then it is 100 Multiplied by 3 which is 300. To get the share premium you subtract 100 from 300= 200.

[15] Although in practice, special resolution is required by CAC (See Section 29 Companies Regulations, 2012.

[16] Notice should have particulars of increase, class of shares affected, conditions.

Isochukwu

Quite eccentric really

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