TNAG-1059-FCO40-1309-Guangdong-nuclear-power-station-project-1981 — Page 152

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2. EQUITY IN THE UK

CONFIDENTIAL

Equity share capital is defined in Section 154(5), Companies Act 1948 as the

issued share capital of a company excluding any part which neither as regards

dividends nor capital carries any right to participate beyond a specified

amount in a distribution. In general terms, the potential liability of a holder

of equity share capital is limited to the amount, if any, uncalled in respect

of the issued share capital, ie the difference between the nominal amount of each share and the amount paid up. Uncalled capital may be called at any time

in accordance with the company's articles. Almost invariably, in modern times,

the share capital will be fully paid up and thus the liability of ordinary

shareholders will be limited to the amount of capital contributed.

This is the classic concept of limited liability. Except for any uncalled

share capital or, in the case of fraud or fraudulent trading, the maximum

loss for an equity shareholder is generally limited to his original investment.

The rewards of such equity shareholders are that neither dividends nor capital

distributions in a winding up are limited. The risk which balances these

potential rewards is that equity shareholders are the last to be paid in a

liquidation.

In order to help put equity capital in some perspective two other conventional

forms of corporate capital might briefly be mentioned here, namely loan capital

and preference capital. Holders of loan capital (which might be secured or

unsecured or made subordinate to other corporate borrowings) have no right to

participate in surplus profits and capital but have rights to both a specified

rate of interest and repayment of principal in priority to the equity and

preference capital.

Preference shares, which can be looked at as a hybrid between equity and loan

capital, generally have a right to a fixed dividend in preference to the

equity shareholders and a preferential right, after all other creditors, to

capital repayment in a winding up; in some cases preference shareholders may

be granted rights to participate in surplus profits of the company after the

repayment of a specified rate of divident in the equity share capital. This

form of participating preference share would, under UK law, be regarded as equity.

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