Simply put, called-up share capital is the amount of money that shareholders are required to pay for their shares, either immediately or at a later date. This concept is crucial in corporate finance because it allows business owners to manage their cash flow by requesting only the amount needed at a specific time rather than requiring shareholders to pay the full value of their shares upfront.
If you are a shareholder, it is also vital that you understand called-up share capital, as it can impact the stability of your investment. Therefore, in this article, we will comprehensively discuss the concept of called-up share capital and its importance in the corporate world. By the end of this article, you'll have a clear understanding of:
What called-up share capital is and how it differs from paid-up capital and others.
Its implications on a company's financial structure and valuation
How called-up share capital affects shareholders and their obligations
The legal framework surrounding called-up share capital UK.
What Is Called Up Share Capital?
As a business owner, if you want your business to thrive and generate profits, you need capital. Capital can be sourced from various avenues, including bank loans, personal savings, or investments from willing shareholders. If you choose to fund your business through shareholders, you typically sell them shares with varying values.
When it’s time for your investors to pay for their shares, you have two options: you can either request the full value of their shares upfront, or you can accept a portion of it, with the remainder to be paid later. When shareholders pay the entire value of their shares at once, this is known as paid-up capital.
However, if you need funds for business operations or expansion and you decide to request only a certain percentage of the share value, this is referred to as called-up share capital. Called-up share capital allows you to raise the necessary funds without overburdening investors.
For example, if you issue 1 million shares at £100 each, the share capital is £100 million. Now, in the process of expanding your business, if you ask all your shareholders to pay £50 each (instead of the share value, which is £100), then this is your called-up capital.
This type of share capital is different from issued and paid-up capital, though all are intricately linked within the company's financial framework.
Issued share capital: This refers to the total amount of the shares a company sells to their investors. From our scenario above, £100 million is the issued share capital of the company. It should be noted that according to the CA 2006 ruling, there is no limit to the number of shares a company can sell to their investors.
Called-up share capital: This, on the other hand, refers to the portion of the issued share capital that the investors are required to pay at a specific time. This amount is 'called up' by the company, meaning shareholders are obligated to pay the outstanding amount on the shares they hold, either in full or in instalments, as determined by the company's requirements.
Paid-up capital: This represents the actual funds received by the company from its shareholders in exchange for shares. This share capital is generated when a company sells its shares directly to investors on the primary market, typically through an initial public offering (IPO).
The Legal Framework Surrounding Called Up Share Capital
Companies Act 2006 (abbreviated to the CA 2006) made some significant changes to the older law ( Companies Act 1985) regarding how companies must handle their share capital, including called-up share capital.
Companies must keep accurate records of the money they ask shareholders to pay and must show this in their financial reports.
Under CA 2006, there is no limit to the number of shares a company can issue to investors. If you however want a limit, the number should be accurately stated in the company’s articles of association.
The act also mandates that the rights of minority shareholders must also be protected. That is, corporations must not prioritise majority shareholders over their minority counterparts.
The CA 2006 also offers a more flexible operational structure, making it easier for companies to adapt and manage their affairs efficiently.
The Companies Act 2006 does not provide a statutory procedure for increasing authorised capital, so older companies must amend their articles of association if they want to increase their shares.
For new companies incorporated under the CA 2006, shares can be allotted to new members without restriction, depending on the company's articles.
How Called Up Share Capital Works
Here is a brief rundown of how called-up share capital works:
Issuing Shares
There are various steps involved in managing called-up share capital, starting from the initial issuance of shares. If a company needs to sell shares to investors to meet their fund requirements, here are the steps involved:
The first step is to obtain approval from the company's board of directors. It doesn’t matter if the shares are for new or old investors, the first step is always to let the board of directors deliberate on the decision and then approve it.
Next, review the company’s articles of association to ensure they authorise the issuance of shares. If the articles do not currently allow for this, the company will need to amend them to reflect its ability to issue new shares.
The next step is to decide on the specific details of the shares to be issued. This includes the type of shares, the number of shareholders, and the price of each share.
After the details of the shares have been ironed out, the next step would be to allocate the shares to the investors or members. Make sure you record the information about the investors or members that buy the shares including how many they have bought.
Lastly, the company would then update its shareholder register and issue share certificates.
Payment Terms
Although shareholders are legally required to pay the amount owed when capital is called up, there are no specific rules on how and when it must be paid. Instead, the company decides when and how much shareholders need to pay.
Recording in Accounts
Called-up share capital is typically recorded under the "equity" section of the balance sheet. This reflects the total amount that shareholders are required to pay for their shares. If shareholders haven’t paid the full amount of their share value, this debt will be recorded as "Debtors" or "Receivables" under current assets.
When shareholders pay the called-up amount, the company reduces the amount owed by them and adds the payment to become part of the company’s capital.
Implications of Called Up Share Capital for Companies
Called-up share capital can have several effects on a company and its shareholders:
Company’s Financial Obligations
When a company issues shares and calls up capital from investors, it generates immediate or future receivables to expand its reach and production or pay off debts. For investors, called-up share capital ensures that they don’t get overburdened by having to pay the full amount for their shares all at once.
However, when a company issues shares and calls for payment from shareholders, the unpaid portion of the called-up capital is recorded as a liability on the balance sheet. This liability reflects the amount that shareholders are obliged to pay and can affect the company’s financial ratios, particularly the debt-to-equity ratio. A higher ratio of unpaid called-up capital may indicate potential liquidity challenges, as the company relies on future payments from shareholders to maintain its financial stability
Shareholders' Liability
Irrespective of how and when the company demands it, both majority and minority shareholders are legally obligated to pay their called-up capital when requested. The effect of this on shareholders is that they must be prepared to fulfil this financial commitment, which can impact their personal finances or investment strategies when the payment is due. If, for whatever reason, they refuse to pay, the company might take legal action, and they could lose their shares.
Impact on Company Valuation
It is also possible for called-up share capital to influence how a company is viewed or valued by external investors. For instance, an interested investor reviewing the company’s financial records may notice the amount of unpaid capital expected from shareholders. This can raise a red or green flag, depending on whether the amount suggests financial strength or the opposite.
Common Scenarios Involving Called Up Share Capital
Called up share capital can come into play in different situations:
Startups and New Companies
For startups, called-up share capital is a brilliant strategy to manage cash flow and avoid unnecessary frugality. Since new businesses don’t operate on the same level as established companies, they might not need all the money from shareholders right away. So, by calling up the capital as they grow, startups can ensure they have funds available when needed, allowing them to expand their scale operations and growth.
Expanding Businesses
For a business looking to expand and compete with top companies, they might ask shareholders to pay a percentage of their share value now and the remainder later. This approach allows the company to cover immediate expenses while also funding future projects or entering new markets.
Insolvency Situations
In the unfortunate event of company insolvency, unpaid called-up share capital can have significant implications. Shareholders with unpaid capital are still liable to pay the outstanding amounts, which could be crucial in satisfying creditors' claims. During insolvency proceedings, the company may issue a call on all outstanding shares to collect the remaining capital. Failure by shareholders to meet these obligations can lead to forfeiture of their shares and may reduce the overall recovery for creditors.
FAQs
What is the difference between called-up and paid-up share capital?
Called up share capital is the money a company asks shareholders to pay for the shares they have agreed to purchase. Paid-up share capital is the money that has already been paid by shareholders.
What happens if a shareholder does not pay the called-up capital?
If a shareholder fails to pay after the company has called up their share capital, the company may take legal action to recover the funds, or the shareholder may lose their shares.
How is called-up share capital reflected in a company’s balance sheet?
If shareholders haven’t paid, it’s shown as a receivable under assets; once paid, it’s recorded as equity in the company’s capital.
Can called-up share capital be returned to shareholders?
No! Called-up share capital is non-refundable even if the investor exits the company. It, however, can be transferred to another shareholder in the same company. The process of transferring existing shares to another shareholder is called allotment.
What are the tax implications of called-up share capital?
Called-up share capital generally has no direct tax implications until it is paid, at which point it may influence the company’s taxable equity and overall tax liabilities.
Conclusion
Understanding called-up share capital is crucial for both businesses and investors. For companies, it offers a flexible way to raise funds and manage financial obligations, while for investors, it represents a significant financial commitment and potential liability.
Let LawHive be your partner in ensuring that your corporate finance strategies are legally sound and optimised for success. Whether you're a startup needing help with initial share issuance or an established business seeking advice on managing share capital during expansion or insolvency, LawHive offers expert legal services tailored to your needs. Contact us today to connect with experienced solicitors who can guide you through every step of your corporate finance journey and ensure your business decisions are backed by solid legal foundations.