Share capital and the principle of maintenance of share capital
Companies can raise finance by issuing shares. A company’s share capital is divided into individual shares and s.542 Companies Act 2006 (CA 2006) requires that each share has a fixed nominal value, sometimes referred to as a par value. One of the most common nominal values for private limited companies is £1. As an example, a company may have a share capital of £100,000 divided into 100,000 shares of £1 each.
The nominal value of a share does not usually bear any relationship to the market value of that share. For this reason a person wishing to subscribe for shares in a company may be required to pay more than the nominal value for those shares. If an investor pays more than the nominal value when subscribing for shares, the extra amount paid, over and above the nominal value, is referred to as the premium and such shares are said to be ‘issued at a premium’.
A company’s issued share capital is regarded as a permanent fund available to creditors. The amount paid up on the issued share capital of a company is a fund of last resort available to creditors should the company fail. To maintain this fund of last resort, a company is not allowed to return the share capital to shareholders except in certain limited circumstances. This is known as the principle of maintenance of capital and is one of the key principles of company law. However, many private companies have a relatively small share capital and in such cases the protection for creditors will be very limited. In any event, it is wrong to think that the money which shareholders have paid for their shares is somehow locked away, to be brought out when creditors need to be paid. The money which shareholders pay for their shares will be used by the company for its business and corporate purposes.