Generally, share capital is defined as:
Share capital is the total amount of capital provided by all shareholders of the company in return of proportion of shares, possessed by each shareholder of the company.
Once shareholders acquire shares of the company after business registration Hong Kong, then the amount they pay for acquiring these shares, becomes the asset of the company. However, company is liable to repay this amount to the shareholders, in case company is subjected to winding up. It must be kept in mind that “Share Capital” is the general term and usage of this as well as the interpretation of this is totally dependent on the context of usage and reference of it after business registration Hong Kong.
Pt. 4 of Cap. 622 contains the primary provisions related to share capital and one may find all legislative framework of share capital in these provisions. Discussion and reference to Share Capital is extended to other provisions of Cap. 622. So, one should not hold himself/herself to just Pt. 4 of Cap. 622.
Abolition of Share Premium, Par Values of Shares and Authorised Capital
As per the predecessor companies ordinance, it was mandatory for open company in HK to disclose the share capital of the company along with the division of share capital into the number of shares, in company’s memorandum of association to obtain certificate of incorporation Hong Kong. For example, if company’s share capital is $15,000,000, then company’s memorandum of association should mention that:
Company’s share capital is $15,000,000 with 150,000 shares, each having value of $100.
The amount of $15,000,000 will be called the authorised share capital of the company and it is the maximum amount that company could raise. But, this share capital is not supposed to remain fixed throughout the corporate journey of the company, and thus company can raise it by amending the memorandum of association of the company.
Instead of just saying that each share holds the value of $100 one can simplify this phrase, because there exists a proper terminology named as “nominal or par value”. Hence one can say that; company has share capital of $15,000,000 having 150,000 shares with the nominal value of $100 (for each share). The nominal value of the share is the fixed amount of each share and the one which is disclosed in company’s memorandum of association. So, par value of the shares can be seen as an arbitrary value as mentioned in company’s memorandum of association and has no link with the market value of company’s shares. As per the doctrine of capital management; par value of the shares has some implications on the part of the issue price of shares because shares cannot be issued at the discount price. Issuance of share at the discount price means the issuance of the shares at the price below par value. This implication is due to the fact that; issuance of the share at the price below par value would lead to the misleading disclosure of share capital in company’s memorandum of association because real capital share would be less than the mentioned one. Doctrine of capital management is applied so as to enable shareholders to pay fully to the company, in accordance with the shares possessed by him/her. If this doctrine is not followed, then fair probability exist that there shall be contrast between the actual capital share of the company and the mentioned share capital in company’s memorandum of association.
However, shares could be issued at the price above par value and such shares would be called as the one issued at the premium. The only difference between the par value and the issued shares is the premium. The need to issue shares at the premium value is the situation where the market value of share is above the par value. For the situation where shares were issued at the premium value, then company should have the premium account so that aggregate values of the shares could be ascertained. For the purpose of capital management, share premium is considered as the part of the company’s share capital and hence, there is no requirement to repay it to the shareholders in case of winding up of company. Therefore, company’s accounts would be the distinguishing factor which would cast the contrast between share premium and paid up share capital of the company.
But as Cap. 622 brought many amendments in the legislative framework of Hong Kong’s corporate structure, so there is no requirement for the shares of the company to have nominal value or the par value. For companies incorporated before the enactment of Cap. 622, par value of shares is considered to be obsolete. This abolition of par value is done on account of following reasons:
Hong Kong is not the only country which abolished the concept of issuance of share at par value. New Zealand, Australia and Singapore are other geographical regimes who also abolished the concept of nominal or par value.
Cap. 622 not only abolished the issuance of share value instead it also abolished the concept of authorised share capital of the company. Those companies which have provisions related to authorised share capital of company in its memorandum of association and these companies were incorporated prior to the introduction of Cap. 622, then such provisions would be considered to have extinct. It has been said that, authorised share capital offered protection to the shareholders and thus it should be enacted. To this argument legal commentators comment that; similar protection to the shareholders have been incorporated in the provisions of Cap. 622 as per which; constitution of the company should state the maximum number of shares, to be issued by the company. However, this provision is optional and thus company can amend its share capital by the way of ordinary resolution.
As abolition of par value of shares has been done in the Cap. 622, so there is also the abolition of difference between the share capital of the company and the share premium of the company. However, for the pre-incorporated companies i.e. the companies incorporated prior to enactment of Cap. 622, the amount standing to be the credit in relation to share premium account of the company, shall now be considered the part of the share capital of the company.
Share Capital Profile
Let’s discuss the profile or constituents of share capital in an interactive way. Consider the situation where after Hong Kong company formation, 50,000 shares of company were issued at the value of $100 for each share. Shareholder did not make full payment and partly paid $60 against each acquired share. Company now wants to raise its share capital and to do so it made a call to the shareholders to pay $10 more against each acquired shares. So now up to the date of call, following is the share capital profile of the company.
Issued capital of the company = $5,000,000
Paid up capital of the company = $3,000,000
Unpaid capital of the company = $2,000,000
Called up capital of the company = $3,500,000
Uncalled capital of the company = $1,500,000
Now the beginner may find difficulty in grasping the concept of these terminologies, so let’s define and explain them in detail.
Issued Capital of the Company
Issued capital of the company refers to the total value of the shares acquired by all shareholders, in relation to acquired shares by each shareholder. For example, if after open company in HK, there are 50,000 shares of the company that are issued at the value of $100 for each share, then total issued capital of the company would be as:
Issued share capital of the company = 50000 x 100
It must be noted that; subscribed capital of the company is another terminology used alternatively for the issued capital of the company. Hence, one must not confuse this, as both terminologies refers to the same thing.
Paid up Capital of the Company
This is the actual paid capital by the shareholders in relation to acquired shares by each shareholder. This amount includes the amounts that is considered to be paid up by the shareholder. For example, those amounts which refers to the issuance of bonus shares to the shareholder because for such situation shareholder does not have to pay amount but amount on the shares such as dividend, is treated as been paid by the shareholder.
If shares are issued against partly paid amount rather than the full payment then paid up capital would be less than the issued share capital of the company. But, if shares are issued upon full payment of amount then amount of issued share capital would be same as that of paid up capital.
For example, if there are 50,000 shares in the company and each shareholder paid $60 instead of $100 against each acquired, then paid up capital of the company would be:
Paid up capital of the company = 50,000 x 60
Unpaid Capital of the Company
Unpaid capital is the amount of money that has not yet been paid by the shareholders against their acquired shares in the company. For example, consider that company issued 50,000 shares having value of $100 for each share but instead of $100 shareholders paid $60. Then in this condition difference of issued capital of the company and the paid-up capital of the company, would be called as the unpaid capital of the company. It is calculated as:
Unpaid capital of the company = Issued capital of the company – Paid up capital
Unpaid capital = $5,000,000 - $3,000,000
Called up Capital of the Company
For the situations where company issued shares to the shareholders upon partial payments, then upon any need company reserves the right to make a call. Upon the call, shareholders are supposed to pay out of their unpaid amounts.
Suppose, company issued 50,000 shares. Out of the required full payment of $100, shareholders were issued shares upon the partial payment of $60. Now company made a call to all shareholders to pay $10 more, out of their unpaid payment, for each acquired share. So, in this way total paid up value for each share would now be $70. Hence, on account of this, called up capital of the company would now be:
Called up capital of the company = 50,000 x 70
= $ 3,500,000
Uncalled Capital of the Company
Any such capital which has not yet been called by the company from shareholders is known as the uncalled capital of the company. In other words, uncalled capital can be defined as the capital which has not yet been called by the company from its shareholders. Unpaid capital of the company is calculated as the difference of issued capital and the called-up capital of the company:
Uncalled capital of the company = Issued capital – called up capital
= $5,000,000 - $ 3,500,000