Share capital — allotment, transfer, maintenance of capital

BLP.07 - Share Capital: Allotment, Transfer, Maintenance of Capital

Allotment - Companies Act 2006

For ordinary new share issues, work through four separate gates. Special employee-scheme and existing subscription/conversion-right allotments have their own exceptions.

1. Capital ceiling. There is no default authorised-capital ceiling under the regime effective from 1 October 2009. Check the articles, including any old memorandum ceiling. It is treated as an articles provision setting the maximum amount of shares that may be allotted, and it may be amended or revoked by ordinary resolution, filed within 15 days (SI 2008/2860, Sch.2 para.42).
2. Directors' authority. Section 550 permits directors of a private company with only one class to allot shares of that existing class, or grant subscription/conversion rights into them, unless the articles prohibit it. Member adoption of s.550 (an ordinary resolution suffices) is required for old-regime companies: those within the Companies Act 1985/Companies (Northern Ireland) Order 1986 regime immediately before 1 October 2009 ('existing'), or formed and registered, or re-registered, under those laws on or after that date through the transitional savings ('transitional'; SI 2008/2860, art.2 and Sch.2 para.43). Section 550 does not authorise a new second class or apply to public companies. Otherwise, the ordinary s.551 route is authority in the articles or by ordinary resolution: specify a maximum nominal amount and expiry no more than five years from incorporation for original articles, or from the authorising resolution otherwise. File that resolution within 15 days; prior registration is not a condition of authority (ss.551(9), 30). A director who knowingly allots without s.550 or s.551 authority, or knowingly permits or authorises it, commits an offence, but the allotment itself remains valid (s.549(4)-(6)).
3. Statutory pre-emption. For cash allotments of equity securities, offer existing ordinary shareholders their proportion by nominal ordinary capital on the same or more favourable terms (ss.560-562). Equity securities include ordinary shares and rights to subscribe for or convert securities into them; "ordinary shares" excludes only shares that, as respects both dividends and capital, carry a right to participate only up to a specified amount in a distribution (s.560(1)). A share capped on dividends but not on capital is still an ordinary share for pre-emption purposes. The offer must state an acceptance period of at least 14 days beginning with (and so including) the day the offer is sent (electronic form), sent or supplied (hard copy), or published in the Gazette, and cannot be withdrawn during that period (s.562(4)-(5)). Before allotting to the outsider, wait until the offers expire or the company receives notice accepting or refusing every offer (s.561(1)(b)). Bonus shares, wholly or partly non-cash allotments and qualifying employee-scheme allotments are excluded (ss.564-566); no statutory disapplication is then needed. Cash has a statutory meaning, including release of a liquidated company debt (s.583). Check separate articles or contractual rights too. The statutory remedy for breach of s.561 or s.562 is compensation: the company and every officer who knowingly authorised or permitted the breach are jointly and severally liable to each person who should have received an offer, and proceedings must begin within two years of delivery of the return of allotment (or, for rights to subscribe or convert, of the grant) (s.563).
4. Registration and reporting. Allotment gives an unconditional right to registration (s.558); ordinary registered shares are issued on entry in the register of members. Register the allotment as soon as practicable, within two months; file SH01 within one month of allotment (ss.554-555). Check resulting PSC changes separately: post-incorporation notifications under ss.790LA/LD/LF run for 14 days beginning with confirmation of the required status/particulars, or change/cessation and its date. An unconfirmed new registrable person or relevant legal entity must instead be notified within 14 days beginning when the company first knows or has cause to believe it became registrable (s.790LC). Do not count all deadlines from allotment or wait indefinitely for confirmation.

Exclusion and disapplication are distinct from allotment authority. Any private company may exclude statutory requirements through its articles (s.567). For a one-class private company, s.569 permits a power in the articles or a special resolution for equity securities of that class. With general s.551 authority, s.570 likewise permits articles or special-resolution disapplication; with s.551 authority, s.571 permits a specified-allotment special resolution, recommended by directors with a circulated written statement explaining the reasons, consideration and its justification. Sections 570-571 powers are tied to the underlying authority's duration.

No allotment below nominal value (s.580). Issue premiums normally go to the share premium account, subject to statutory reliefs (s.610).

Transfer - existing registered shares

• For an ordinary certificated transfer, deliver a proper transfer instrument (usually a stock transfer form) and share certificate; deal with any stamp duty before registration. Exempt transfers, electronic settlement and transmission by law have different rules (s.770). On a holder's death or bankruptcy, a transmittee who produces the evidence the directors properly require may choose to become the holder or to have the shares transferred to another person, and meanwhile has the holder's rights, but cannot attend or vote at a general meeting or agree to a written resolution until registered as holder (Model Article 27).
• On an ordinary chargeable paper transfer, stamp duty is 0.5% of the whole chargeable consideration, rounded up to the next GBP 5. The GBP 1,000-or-less exemption requires the certificate and no larger transaction or series exceeding GBP 1,000. Other reliefs/exemptions may apply; electronic purchases generally use SDRT instead. The fresh issue itself is not a transfer attracting these charges. The 0.5% charge applies to a transfer on sale, so a gift of shares for no consideration does not attract it (FA 1999 Sch.13 para.1).
• Legal title passes on register entry, not signing. Check articles for any directors' refusal power (e.g. Model Article 26). Register or notify refusal with reasons as soon as practicable, within two months of lodgement (s.771).

Maintenance of capital - redemption and buyback

Capital cannot simply be paid back to members. Dividends require profits available for distribution: accumulated, realised profits, so far as not previously distributed or capitalised, less accumulated, realised losses, so far as not previously written off in a duly made reduction or reorganisation of capital (s.830). Public companies also face the net-assets restriction (s.831). Lawfulness is judged by reference to the relevant accounts, normally the last annual accounts (s.836). Under the Model Articles, the company declares a final dividend by ordinary resolution, only after a directors' recommendation and not above the recommended amount, and the directors may decide to pay interim dividends (Model Article 30). A member who receives an unlawful distribution knowing, or having reasonable grounds for believing, that it was unlawful must repay it (s.847). Directors who cause the company to pay an unlawful dividend are accountable to it for breach of duty, and the established remedy is to restore the full amount paid. This is subject to the court's discretion on a misfeasance claim in a liquidation (Insolvency Act 1986 s.212(3)) and to its power to relieve a director who acted honestly and reasonably and ought fairly to be excused (s.1157) (HMRC v Holland [2010] UKSC 51, [49] and [56], citing Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712). Redemption and buyback are separate statutory routes, subject to articles restrictions.

• Redemption (ss.684-689): shares must be redeemable on their terms and fully paid. A public company needs articles authority to issue redeemable shares; a private company's articles may restrict it. Non-redeemable shares must already be in issue when redeemable shares are issued. Directors may fix redemption terms before allotment if authorised by articles or ordinary resolution; otherwise the terms belong in the articles. Pay on redemption unless the terms permit agreed later payment. Redeemed shares are cancelled; notify the registrar with a statement of capital within one month.
• Ordinary off-market buyback (ss.690-696): fully paid shares, paid for on purchase. The purchase must leave issued shares other than redeemable or treasury shares. Approve the contract terms by ordinary resolution before contracting, or make the contract conditional on approval before purchase. Supply the contract/memorandum with a written resolution, or make it available at the registered office for at least 15 days ending with the meeting and at the meeting. Apply s.695's seller-voting restrictions. Return the purchase within 28 days beginning with delivery of the shares to the company; cancellation has a separate notice/statement-of-capital requirement (ss.707-708).
• Ordinary funding (ss.687, 692): distributable profits or proceeds of a fresh issue made to fund the redemption/purchase. Under this funding route, any redemption/purchase premium normally needs distributable profits. Fresh-issue proceeds may fund that premium only if the acquired shares were issued at a premium, and only up to the lower of their original aggregate issue premiums and the current share premium account (including the new issue premium); reduce that account accordingly. If shares are redeemed or bought back wholly out of profits, transfer the nominal value cancelled to the capital redemption reserve; if fresh-issue proceeds are used and are less than the nominal value cancelled, transfer the difference, unless a private company also makes a payment out of capital (s.733).

Private-company payment out of capital: ordinary Chapter 5 route (ss.709-723). Use available profits and relevant fresh-issue proceeds first; the shortfall is the permissible capital payment. Obtain the s.714 directors' statement specifying that amount and addressing ability to pay debts immediately after the proposed payment and continued business/debt payment over the following year, with the auditor's report annexed. This is not the s.643 solvency statement. Approve the capital payment by special resolution on or within the week after the statement, observing ss.717-718 voting and disclosure rules. Within the following week, publish in the Gazette AND either an appropriate national newspaper or notify every creditor in writing. File the statement/report by the first notice and keep them available for inspection through the five-week objection period. Creditors and non-assenting members may apply to court within five weeks of the resolution. Pay no earlier than five and no later than seven weeks after it, subject to the court's powers.

Different capital-buyback routes: s.692(1ZA) allows an articles-authorised annual aggregate purchase price up to the lower of GBP 15,000 and 5% of opening fully paid nominal share capital, outside Chapter 5. The s.720A employee-scheme route instead uses a special resolution supported by a s.643 solvency statement and its own registration requirements. Neither uses the ordinary checklist unchanged.

Common traps

• One class alone is not enough for s.550: private company, existing class, articles and transitional adoption all matter.
• Allotment authority, statutory pre-emption and agreed rights are separate questions.
• Ordinary buyback contract approval is not special approval of an ordinary Chapter 5 capital payment.

Practise at the real standard

Strong on this topic? SQE1 tests 137 of them, and 58% did not pass in July 2026. See where you stand across all of them.

Complete includes

• ✓An AI tutor on every question. The tutor already knows the correct answer
• ✓5 full timed mock papers, plus unlimited drilling — no daily cap
• ✓The whole 2,263-question bank, with worked answers and references, all 137 topics
• ✓Your weak-spot map: exactly where you’re losing marks

One payment, nothing recurring. The 25-question diagnostic is free with no card.