Model articles and unpaid shares

[sheendirector]

Hi,
In model articles, clause 21 says: "
21.—(1) No share is to be issued for less than the aggregate of its nominal value and any

premium to be paid to the company in consideration for its issue.

(2) This does not apply to shares taken on the formation of the company by the subscribers to the company’s memorandum.
"
Does (2) mean shares taken on the formation don't need to be fully paid?

 

[John Hemming]

They can be part paid. In a sense it would be impossible to form a company because it would not be possible to pay a company until it exists.

https://www.bdo.co.uk/en-gb/insights/tax/global-employer-services/nil-or-partly-paid-shares

 

[CandC]

They can be part paid. In a sense it would be impossible to form a company because it would not be possible to pay a company until it exists.

Does this apply for non-employees such as directors as well?
For example, if shares are allotted at incorporation and issued to directors for their know-how/efforts on behalf of the company.

 

[Ozzy]

allotted at incorporation and issued to directors for their know-how/efforts on behalf of the company.

This is more of a commercial agreement between shareholders than with the company itself, and sounds like something that would come into the terms of a shareholders agreement.
Ultimately shares will eventually always need to be paid up as it's a debt to the company, and if the company was to be wound up by a liquidator the IP will chase the shareholders for that debt. In practice most small businesses only have a handful of shares issued at £1 each and the accountant will clear it off via a directors loan account in the first years accounts.

 

[CandC]

This is more of a commercial agreement between shareholders than with the company itself, and sounds like something that would come into the terms of a shareholders agreement.
Ultimately shares will eventually always need to be paid up as it's a debt to the company, and if the company was to be wound up by a liquidator the IP will chase the shareholders for that debt. In practice most small businesses only have a handful of shares issued at £1 each and the accountant will clear it off via a directors loan account in the first years accounts.

Hello Ozzy, thank you for the speedy reply.

A quick related question if you might be so kind.

Would the entry in the balance sheet for this kind of arrangement be listed as "called up share capital not paid" or would it be entered in somewhere else?
It seems somewhat confusing as, depending on one's interpretation, they could be considered paid, partially paid or unpaid. My initial thought would that it should be considered "called up share capital not paid" but I am unsure. What are your thoughts?

Also, if additional new shares were allotted to a new director after incorporation in exchange for know-how and some kind of service (e.g. creating a software prototype) would that be entered in as a fixed asset (intangible property) in the balance sheet?

Presumably these newly issued/alloted shares (to the new director after incorporation) would be then considered fully paid up and the prototype would reflected as fixed assets on the balance sheet. Is that correct or have I missed something?

We have our first accounts filing deadline coming up shortly and I am somewhat confused as to how to reflect these points in the balance sheet in the web-filing section on the Companies House site.

Any insight would be tremendously helpful. Many thanks.

 

[Ozzy]

Firstly, I would encourage you to ask an accountant to complete this for you if you are unsure. Any comment here is based on limited understanding and knowledge of your company share structure and commercial agreements.

Anyway, on your two specific questions...
Unpaid shares are a debt, so on the balance sheet they could be listed as unpaid share capital (it's ultimately just a label) under assets.

allotted to a new director after incorporation in exchange for know-how and some kind of service

As far as the accounts are concerned "exchange for know-how" doesn't exist. That is an agreement between you and the other party and nothing to do with the accounts. In your accounts this person still needs to pay for those shares, and this could be by way of a directors loan or you give them the money to pay for the shares. I'm sure there will be ways this can be structured that I'm not familiar with, and perhaps an accountant will be able to expand on that better. Legally though, the shares will need to actually be paid for eventually.

 

[CandC]

Firstly, I would encourage you to ask an accountant to complete this for you if you are unsure. Any comment here is based on limited understanding and knowledge of your company share structure and commercial agreements.

Anyway, on your two specific questions...
Unpaid shares are a debt, so on the balance sheet they could be listed as unpaid share capital (it's ultimately just a label) under assets.


As far as the accounts are concerned "exchange for know-how" doesn't exist. That is an agreement between you and the other party and nothing to do with the accounts. In your accounts this person still needs to pay for those shares, and this could be by way of a directors loan or you give them the money to pay for the shares. I'm sure there will be ways this can be structured that I'm not familiar with, and perhaps an accountant will be able to expand on that better. Legally though, the shares will need to actually be paid for eventually.

Thanks again, I will definitely be consulting with an accountant soon.

Regarding the second question/answer, I was under the impression that the payment for shares could be in cash or in the form of a service (creating a software prototype in our case)
I will have to check up on that as well.

Thank you.

 

[Ozzy]

or in the form of a service (creating a software prototype in our case)

Yes, but in the accounts that service has a monitory value which has a tax impact too. As an example, you can give someone shares for "free" and still those shares will need to be commercially valued and that person will have to pay tax on that commercial value even if no money changed hands between the two of you.