UK: England and Wales: Court of Appeal confirms that shares were not alloted at a discount

Section 580(1) of the Companies Act 2006 provides that "[a] company's shares must not be allotted at a discount". Last Friday, in Chalcot Training Ltd v Ralph [2021] EWCA Civ 795, the Court of Appeal unanimously upheld the trial judge's decision (at [2020] EWHC 1054 (Ch)), that shares issued as part of a tax avoidance scheme had not been issued in contravention of section 580.  In what is - I believe - the first appellate decision to consider section 580, Lewison LJ (with whom Arnold and Edis LJJ agreed) observed (paras. [43], [50] and [73]):

The idea behind the limited liability company is that people will be encouraged to be associated in a business enterprise if they are able to limit their personal liability for the debts of the enterprise. The way in which this is achieved is by the creation of a corporation with limited liability. What that means is that the personal liability of the members of the company is limited to the amount that they have subscribed or agreed to subscribe to the capital of the company. The capital in this instance is the company's nominal share capital. It is part of the very definition of a limited company in section 3 of the Companies Act 2006. That provides that a company is a company limited by shares if the liability of its members "is limited to the amount, if any, unpaid on the shares held by them." This fundamental feature of corporate liability has been recognised for a very long time. It was introduced by the Joint Stock Companies Act 1856; and repeated in the Companies Act 1862". 

"The prohibition on issuing shares at a discount to nominal value thus long pre-dated section 580. Although it was described as a "common law" prohibition, it is, I think, more accurately described as inevitably flowing from the statutory machinery for the creation of a limited liability corporation".

".... the mischief against which section 580 is directed (as confirmed by all the cases that we have been shown) is the depletion of the company's nominal share capital".

Kiribati: company and insolvency law reform

The Republic of Kiribati - as it became known on gaining independence from the United Kingdom forty years ago - is to reform its company and insolvency laws. Draft Bills have been published, including a Companies Bill and a Company Insolvency Bill: see, respectively, here (pdf) and here (pdf). The Bills are accompanied by a consultation paper: see here (pdf). The new Companies Bill, when enacted, will enable companies with a single shareholder to be formed and will abolish the current minimum capital requirements.

UK: BEIS Committee proposes wide-ranging audit reforms

The Parliamentary Business, Energy and Industrial Strategy Committee has published its 'future of audit' report and recommendations: see here or here (pdf). A summary of the report's conclusions and wide-ranging recommendations can be found here. These were also outlined this morning in a speech by the Committee's chair, Rachel Reeves MP: see here.

The recommendations include: requiring auditors to present at company annual general meetings; encouraging the Competition and Markets Authority (CMA), as part of its statutory audit market study, to aim for the full legal separation of audit and non-audit services; if other remedies and reforms fail, the independent appointment of auditors should be considered; and the frequency of audit rotation should be increased by introducing a seven year, non-renewable, period of engagement.

The Committee also made recommendations concerning the creation of the proposed new regulator - the Audit, Reporting and Governance Authority (ARGA) - to replace the Financial Reporting Council (FRC). Current FRC board members, the Committee stated, should have no meaningful role in the reform process or management of ARGA. The Committee also stated its expectation that the new chair of the FRC (and subsequently ARGA), currently being recruited, would not be appointed until they had appeared before the Committee and the Committee had given its opinion.

China: State Council approves removal of minimum capital requirements for certain companies

The State Council announced yesterday that it had approved plans to remove the minimum capital requirements for certain limited liability companies, one-person limited liability companies and joint-stock companies with limited liability: see here.

UK: England and Wales: capital maintenance - damages award not permissible

The High Court gave judgment last week in Abbar v Saudi Economic & Development Company (Sedco) Real Estate Ltd. [2013] EWHC 1414 (Ch). One of the questions considered was whether it was open to the court to make an award for damages in respect of a breach of contract where that contract brought about an unlawful return of capital to the shareholders. The trial judge held that an award for damages was not permissible and stated (at para. [240]): "An award of damages to a shareholder for a failure to repay capital to the shareholder is equally a return of capital. It is for that reason that the statutory provisions in the Companies Act 2006 dealing with the redemption and purchase of shares by a company exclude damages as a remedy for breach. A redemption or purchase of shares by the company can be enforced only through the statutory mechanism."

Jersey: capital maintenance, reduction of capital and the protection of creditors

The Royal Court (Samedi Division) has delivered an important judgment - Re WPP Plc [2013] JRC031 - concerning the effect of the Companies (Amendment No.9) (Jersey) Law 2008 and the Companies (Amendment No.2) (Jersey) Regulations 2008 ("the 2008 amendments") on the courts' approach to the protection of creditors on a reduction of capital. Amongst other things the 2008 amendments introduced into Jersey company law (through amendments to the Companies (Jersey) Law 1991) a new procedure for reductions of capital including the requirement for directors to make a solvency statement. The court held that following these amendments the principle of capital maintenance was of limited application in Jersey, with (new) Article 115 of the 1991 Act making clear that distributions were no longer restricted to being made out of profits. More specifically, the court held (para. [24]):

We reiterate that the 2008 amendments do not remove the duty of the Court to have regard to the interests of creditors in relation to any reduction of capital. The sole effect of the 2008 amendments is that, where the reduction effectively transfers funds from a capital account such as a share premium account (from which distributions may be freely made under Article 115 subject only to the solvency requirement) to a non-capital account (from which distributions may be made on exactly the same basis), it is hard to envisage the Court concluding that creditors may be prejudiced or that any other measure to protect creditors is required. We emphasise however that these observations apply only to a reduction of this nature. Where any other form of reduction is proposed, the Court may still require measures to be taken to satisfy it that creditors will not be prejudiced by the reduction.

Europe: company law - Commission consultation launched

The European Commission launched a wide ranging consultation yesterday on the future of European company law. Amongst the matters on which views are sought are the objectives and scope of European company law, the relationship between company law and corporate governance, the future of European company law entities, cross border mobility, corporate groups and the minimum capital and capital maintenance regimes. For further information see: Commission press release | FAQs | Background information | Questionnaire (for online completion) | Questionnaire (pdf) |.