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Nominal capital may be diminished by the cancellation of shares that have not been taken up, and obviously this is not a reduction of Issued capital.


Profits earned as a result of the employment of the capital in the business are divided amongst the shareholders in proportion to the amount of their holding and in accordance with the priorities attaching to the various classes of shares. Such returns on capital invested are known as dividends.

Dividends can only be paid out of profits, and not out of capital, with one exception, namely, where shares are issued for the purpose of the construction of works or provision of plant which cannot be made profitable for a lengthened period, the company may pay interest on such capital, with the sanction of the Board of Trade, at a rate not exceeding 4 per cent. per annum, and may charge such interest to capital as part of the cost of the work. Any improvement or appreciation of fixed capital may be counted as a profit; but it would be prudent to capitalize such a profit and not distribute it as dividend. The mode of payment is as provided by the Articles of the company. The usual method of payment to holders of share warrants has been referred to under the heading of SHARE WARRANTS. As a rule, the directors are empowered to declare the dividends with the sanction of a general meeting. The members cannot, as a rule, insist on the payment of dividends, even where there are ample profits, if the directors do not declare a dividend. If there is a reserve fund to which profits have been paid from time to time, such profits may be paid away as dividends, though there is a loss on capital.

As already stated, shares may not be issued at a discount, which of course would include "Bonus Shares," i.e., shares issued free of payment; but it is possible for a company having a reserve fund to apply part of the fund in paying for unissued shares, and then to issue those shares, in lieu of a dividend, to its members. The member, in effect, pays for the shares by acquiescing in the transfer of money, which he might otherwise draw as dividend, from the reserve fund to the share capital of the company.


Every trading company has implied powers to borrow money for the purpose of its trading, but the powers cannot be exercised until the minimum subscription has been subscribed; other companies cannot borrow unless the Memorandum of Association

gives power. The power to borrow carries with it the power to charge the company's property as security, and the power is, in some cases, limited by the Memorandum. If a company should borrow beyond its powers, such borrowing is ultra vires and void. There are several methods of securing repayment of the money borrowed, the most usual being a "floating charge," or sometimes a charge over specific property, evidenced by debentures.

Definition of Debenture.

A debenture is a document which is given by a company as evidence of a charge. It is defined by PALMER as "a security for money, called on the face of it a debenture, and providing for the payment of a specified sum at a fixed date, with interest half-yearly, and is usually one of a series." (o) But debentures may be evidence of merely a loan without any security: this, however, is unusual.

Debentures secured on the property and assets of the company are known as "Mortgage Debentures." The charge or mortgage may be created by words in the debenture or, what is more usual, by a deed conveying property to trustees for the benefit of the debenture holders.

In addition to debentures, there can be what is known as Debenture Stock. The difference is not very great, and is similar

to the difference between shares and stock.

Kinds of Debentures.

The following are the broad classes of debentures— (1) Debentures payable to a Registered holder, which are transferred in the same way as shares or stock. (2) Debentures payable to Bearer, which are negotiable instruments. These can be sub-divided, giving additional classes.

(3) Debentures payable to a Registered holder, but with interest coupons payable to Bearer.

(4) Debentures payable to Bearer, but with power to the holder to have them placed on a register and to have them at any time withdrawn therefrom.

Some debentures are known as "Irredeemable Debentures," that is, the debenture holder can never demand payment as long as the interest is paid and the other conditions are observed. Debentures need not be under seal; but, if not, the consideration must be stated. They are, as stated above, frequently accompanied by a trust deed, by which specific property is vested in (0) PALMER'S Company Law, 6th edn., p. 278.

trustees, to hold in trust for the debenture holders, such specific property becoming the security of the debenture holders.

Debentures are issued with a date fixed for repayment of capital, usually five, ten, or twenty years after issue, or they may be perpetual, or may be payable on demand.

Floating Charge.

By a "floating charge " is meant that the company is allowed to deal with its assets in the ordinary course of business until the charge becomes what is termed "fixed." It automatically becomes fixed, or "crystallizes," when the money becomes payable under any of the conditions contained in the debenture. Such conditions usually are

(1) If the company makes default for a period of three months in the payment of interest and the holder then calls in the money; or

(2) If distress or execution is levied on assets of the company and not paid out within seven days; or

(3) If an order is made or resolution passed for the winding-up of the company; or

(4) If a receiver is appointed.

Registration of Debenture Issues, Mortgages, and Charges.

By Section 93 of the Act, all debentures issued and, in fact, any mortgage or charge created by a company, must be registered with the Registrar of Joint Stock Companies within twenty-one days of creation, as well as in the Company's Register of Mortgages and Charges, but need not be registered under the Bills of Sale Acts.

Remedies of Debenture Holder.

If default is made in payment of the principal or interest secured by the debenture, the debenture holder has the following remedies

(1) To sue for repayment of principal, with any interest due. (2) To appoint a receiver, if empowered by the terms of the debenture or, in the absence of such power, to apply to the Court to appoint.

(3) To apply to the court for foreclosure.

(4) To present a winding-up petition against the company.
(5) To have the property sold, if this is authorized by the

debenture trust deed.

A debenture holder is a secured creditor, so if the company should become insolvent he may value his security and sue for

the balance of debt, or give up the security and sue for whole


The second remedy is that more usually adopted, as it offers prospects of the company being extricated from its difficulties, which may prove to be of a temporary nature only.

Unlike shares, debentures may be, and often are, issued at a discount.



Although a company need not have directors, it is usual to appoint certain members who manage the business, make contracts on behalf of the company, and generally look after the property of the company and the interests of the shareholders. Such a person is ordinarily termed a director; he is a combination of trustee and agent for the company, and the body of persons so appointed constitutes the Board of Directors. Usually, one or more directors are appointed as Managing Directors who, in addition to being directors, also manage the business in greater detail. Often one director is appointed Chairman of Directors, in which case he presides at all meetings of directors and also at company meetings.

Agency of Directors.

The directors are agents when they make contracts, unless they contract in their own names. If a director does an act beyond his powers as director, but not beyond the powers of the company, such contract is voidable if made with a member of the company; but, if made with an outsider who had no notice of the want of powers, the company is bound. If the contract is beyond the powers of the company, it is ultra vires and void. In such a case the director is not liable, except perhaps on an implied warranty of authority.

Directors as Trustees.

The directors are trustees for the company when exercising their power of issuing and allotting shares, making calls and approving transfers; but they are not trustees for the individual shareholder, nor for third parties who have contracted with the company. In Percival v. Wright (1902), the directors were negotiating for the sale of the company at a high price, and while the negotiations were in progress they bought shares from a member without telling him of the proposed sale. It was held that the purchase of the shares was good.

Appointment of Directors.

Usually the first directors are named in the Articles of Association. If not so named, they may be appointed by the subscribers to the Memorandum

(1) By a majority at a meeting;

(2) If no meeting is held, by writing signed by all the subscribers.

Subsequent directors are appointed in accordance with the Articles. If not provided in the Articles, the members have power to appoint in general meeting by virtue of the provisions of Table A, referred to on p. 259.

If the first directors are named in the Articles, their appointment is valid only if they have—

(1) Signed and filed with the Registrar a written consent to act; and

(2) Signed the memorandum for their qualification shares, or executed a contract to take them from the company and pay for them.

Share Qualification of Directors.

It is not essential that there should be a share qualification for directors; but the London Stock Exchange refuses a quotation for the shares of the company if no qualification is necessary, and it is invariably the rule for it to be required, and such requirement must be disclosed in the prospectus. Frequently a small share qualification is all that is necessary. A director is bound to take up his qualification shares within two months of his appointment, and the company cannot commence business until every director has taken them up and paid the amount payable on application and allotment.

Unless given express power in the Articles, a director may not enter into a contract with the company; nor may he receive any remuneration except as provided in the Articles.

Directors' Liability on Issue of Prospectus.

Any directors who were parties to the issue of the prospectus are liable for any misstatements therein and, under Section 84 of the Act, in addition to their common law liability they are liable to a further extent in that the burden of proof is on them and not on the plaintiff. To escape liability they must show(1) That they believed the statements to be true, and had reasonable grounds for doing so, or

(2) That the statements were based on the report of an expert

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