Limited Liability Companies III

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In today’s Commerce class, We will continue learning about Limited Liability Companies. We hope you enjoy the class!

 

 

CONTENT

1. Classes of capital of a company.
2. Debentures – Features, Types etc.
3. Liquidation of Companies.

 

THE CAPITAL OF A COMPANY

The capital of a company falls into the different categories which are discussed below.

1. Nominal or Authorized Capital: This is the maximum amount of capital which a company is authorized to raise as stated in its Memorandum of Association. It is also referred to as Nominal Capital or Registered Capital
2. Issued capital: This is that part of the authorized capital that has been issued to shareholders for subscriptions. It may be the same or less than the authorized capital.
3. Called-up capital: This is the part of the issued capital that shareholders have been required to pay up to date. E.g. A company which has issued shares of =N=150,000 out of the nominal capital of =N= 200,000 may require shareholders to pay =N= 0.60 for the time being out of the =N=1 due on each share. In this case, the called-up capital will be =N=90,000 and the remaining =N=60,000 will be the uncalled capital
4. Paid-up capital: This is the part of the called up capital which shareholders have actually paid for. It refers to the sum actually received in cash by the company when it called on the shareholders to pay E.g. out of the =N=90,000 called up, what was actually paid up by (or received from) shareholders might be =N=87,000.
5. Uncalled capital: This is the total amount that has not been called upon the issued capital. It refers to the balance between the called up capital and the issued capital. This may be called on later when more capital is required.
6. Call in arrears: this is the difference between the called up capital and the paid-up capital. It represents part of the called-up capital which is yet to be paid by the shareholders after the call for payment has been made.
7. Calls paid in Advance: This is the money received in advance of calls i.e. the sum the company receives before calls are made for payment.

 

 

DEBENTURES

 

 

These are loans from members of the public to Limited Liability Company. A debenture is also the certificate issued by the company to an individual showing that the company is owing the holder. It normally contains provisions as to payment of interest and repayment of principal (i.e. the original amount taken as a loan).

Debentures-holders receive their interest whether the company makes profit or loss. Debentures may be issued at par, at a premium or at a discount.

 

TYPES OF DEBENTURES

1. Simple or Naked Debentures: These are unsecured debentures i.e. no security is given by the company for the money borrowed.
2. Mortgage Debentures: These are debentures that carry fixed charge upon specific assets of the company e.g. Land & Building, Machinery etc. The company assets serve as security for the debenture. This type of debenture is also called Fixed Debentures.
3. Floating charge Debentures: These are debentures carrying floating charge on some or all of the assets the company, The company has the right to deal with the assets (e.g. sell the assets ) until some defaults occur (e.g. inability of the company to pay interest or repay the principal) when the charge becomes a fixed charge.
4. Redeemable Debentures: These are debentures which are repayable at a date which has been fixed in the future. The company agrees to redeem the debentures on or before the fixed date.
5. Irredeemable Debentures: These debentures are not repayable except the company defaults in payment of interest or on liquidation (winding-up) of the company.

 

DIFFERENCE BETWEEN DEBENTURES AND SHARES

	Debentures	Shares
i.	Certificate of indebtedness	Unit of capital
ii.	It is a Loan	It is Not a Loan
iii.	A debenture holder is a creditor of the company	A shareholder is a member (co-owner) of a company.
iv.	Debentures holders received interest	Shareholders received dividends.
v.	Interest on debentures is a charge against profit	Dividends are an appropriation (distribution ) of profit
vi.	Debentures holders receive interest before dividends are distributed to shareholders	Shareholders received dividend after payment of interest to debentures holders
vii.	Interest on debentures  must be paid whether the company  makes profit or loss	Dividends are only paid out of profit and it is paid only if declared by the directors.
viii.	Debentures holders have no voting rights	Shareholders have voting right
viii.	Interest on debentures is usually fixed, pre-determined and regular.	Dividends may vary, fluctuates with profits and may be irregular.
ix.	Debentures holders take no part in the management of the company	Shareholders take part indirectly in the management of the company.
X	Debentures holders have priority over shareholders in receiving payment in the event  of the company winding up	Shareholders are settled after the debentures holder and other creditors have been paid in the event of winding up.

 

EVALUATION

1. Write short notes on the following terms:

(a)      Authorized Capital

          (b)      Issued Capital

(c)       Called-Up Capital

2. Give five differences between the debentures and shares of a limited liability company.

 

 

LIQUIDATION/ WINDING UP

Liquidation is the process of bringing the existence of a company to an end. A liquidator is a person appointed either by a court or shareholders to handle the winding-up process of a company. The power of a liquidator supersedes that of the company’s directors.

A company may be dissolved/liquidated through any of the following methods:

1. Voluntary liquidation: (by resolution of its shareholders) members can wind up the company if the purpose for which it was established has been accomplished or if the company continues to operate at a loss.
2. Voluntary winding up by members (subject to the court supervision) this obtains if some shareholders petition the court to supervise the winding up.
3. Creditor Voluntary liquidation: creditors can apply to the court and thereafter wind up the company.
4. Compulsory winding up/ involuntary liquidation: as a result of a court order or by the Corporate Affairs Commission.

 

REASONS WHY A COMPANY MAY BE WOUND UP

1. If the company is unable to pay its debts i.e. if the company  becomes insolvent
2. If the numbers of members (shareholders) fall below the required number e.g. 7 for a public limited company.
3. If the company could not raise enough capital for its operations.
4. If the company fails to file (submit) the required statutory reports e.g. annual accounts.
5. If the company fails to hold the statutory meetings e.g. a public limited company is expected to hold an Annual General Meeting at least once in a year.
6. If the number of directors falls below the statutory minimum.
7. If the company does not commence business within one year of its being incorporated or if it suspends business for one year.
8. The name of a company can be struck out by the Registrar of Companies from the register if he is directed to do so e.g. by government order.

 

REVIEW QUESTIONS

1. Who is a liquidator?
2. Give seven reasons why a limited liability company may be liquidated.

 

GENERAL EVALUATION/REVISION QUESTIONS

1          Explain seven factors that encourage the elimination of middlemen from the channel of distribution

2          State five reasons why retail shops adopt self-service

3          State six contents of a bill of lading

4          List seven reasons why small scale businesses may fail

5          State six essential features of a bill of exchange

 

READING ASSIGNMENT

Essential Commerce for SSS by O. A. Longe Page 149 – 166

THEORY

1. What is a debenture?
2. List three features of debentures.

 

 

 

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