CASH CONSIDERATION FOR SHARES
Meaning of 'cash' | The Companies Act 1985 contains the following provisions (sections 738(2), (3) and (4)) which assist in understanding the meaning of 'cash' in this context:
| '(2) For purposes of this Act, a share in a company is deemed paid up (as to its nominal value or any premium on it) in cash, or allotted for cash, if the consideration for the allotment or payment up is cash received by the company, or is a cheque received by it in good faith which the directors have no reason for suspecting will not be paid, or is a release of a liability of the company for a liquidated sum, or is an undertaking to pay cash to the company at a future date.
(3) In relation to the allotment or payment up of any shares in a company, references in this Act (except sections 89 to 94) [which are not relevant in this context] to consideration other than cash and to the payment up of shares and premiums on shares otherwise than in cash include the payment of, or any undertaking to pay, cash to any person other than the company.
(4).....For the purpose of determining whether a share is or is to be allotted for cash, or paid up in cash, 'cash' includes foreign currency.'
| | Private Companies - restrictions on non-cash consideration | In the case of private companies, virtually any valuable consideration suffices. For example, the consideration for an allotment of shares may be a promise to provide certain services to the company.
The courts have held however, that it is beyond the power of a limited company to issue paid up shares for nothing and for the company to preclude itself from requiring payment for the shares in money or money's worth. Also, it has been held that a company cannot substitute an action for damages for breach of contract for an action for non-payment of calls on its shares. So, generally, an agreement to accept the supply of goods at a future time as consideration for future calls is invalid as that would, in effect, be an agreement that future calls could be satisfied by an action for damages for breach of the contract to supply the goods.
If the consideration is apparently valid at the time of the allotment, but later turns out to be worthless, the allotment is still good and the company cannot resile from it.
A well known rule of the law of contracts is that past consideration is not valid consideration. (So a promise by A to do something for B, made in consideration for B's having previously done something for A, is not binding on A as the consideration was something done in the past.) Accordingly, past services for which the company was not liable to pay, cannot validly constitute the consideration for an allotment of shares by the company to the provider of the services. However, if the consideration is in kind, the courts will usually not be concerned as to whether it was of a value equal to the nominal or par value of the shares issued, unless the consideration could be regarded as illusory or had an obvious money value indicating that a discount had been allowed. (Section 100 of the Companies Act 1985 contains an absolute prohibition against allotting shares at a discount, i.e. at less than their par value.)
| | Public Companies | | The initial member(s)/shareholder(s) of a company (who sign or 'subscribe' their names to the memorandum of association) are known as the 'subscribers'. A subscriber to the memorandum of association of a public company must pay the company the nominal value of the shares for which he, she or it subscribes (and any agreed issue premium) in cash - section 106 of the Companies Act 1985. |
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