A Guide to Nil-Paid Shares in a Limited Company

A company may issue shares during or after formation. The shareholders who purchase these shares must pay for them in full during the issuance. However, there are circumstances where a company may allot nil-paid shares. Nil-paid shares are shares that aren't paid for, but the shareholders have already claimed their ownership.

In this blog, we'll explore the nil-paid shares in a limited company and why a company issues these shares. We will also explain whether the status of unpaid shares affects the rights of their shares and when these members are supposed to settle the funds for unpaid shares.

Nil-paid shares Explained

Also referred to as unpaid shares, these are shares for which a member doesn't pay any amount of the share issued. The share issue price in most cases equals the nominal share value, often £1.00 in many companies. However, in other cases, it may include extra sums beyond the nominal value, known as the 'premium.'

The total price of these shares remains unpaid until the day the company “calls on” shares or requests the members to pay the outstanding amount.

Why Would a Limited Company Issue Nil-Paid Shares

A company issues shares to raise capital. It offers an ownership stake in exchange for money or any other mode of payment. However, there are reasons why a limited company may opt to issue nil-paid shares, including:

1. The company is newly registered, and it hasn't opened a business bank account where it can receive the payments
2. To give the members enough time to come up with the money if they don't have the funds to purchase shares
3. To grant the company the opportunity to get back those shares at a later time
4. Allot shares to employees via the employee shares scheme. Issuing your employee's nil-paid shares enables them to delay the payment until a future date, such as until when they decide to sell their shares, without being liable for income tax or NIC on the share value.

However, a company may unintentionally allot unpaid shares. This mainly arises when directors fail to remind or collect outstanding payments from shareholders or if shareholders delay or neglect to pay for their shares.

This scenario is common in small, privately owned companies where one or two founding members are directors.

How are Nil-Paid Shares Issued?

A company can issue nil-paid shares during or after incorporation. This relies on appropriate provisions included in the company's articles of association.

The company articles' provisions address various aspects, including the procedure for "calling on" shares (requesting payment) and forfeiting shareholders' shares if they fail to pay on the requested time.

When a company's articles of association don't include such provisions, they must alter them by special resolution. This requires a minimum of 75% of the votes to make these provisions.

Do Unpaid Shares Provide Equal Rights as Fully Paid Shares?

The unpaid shares provide equal rights to shareholders just like fully paid shares within the same class. Company shares are attached to rights referred to as prescribed particulars, which include

1. Capital rights
2. Voting rights
3. Dividend rights

These prescribed particulars apply whether you've paid or not for the shares. However, in a specific scenario, a company may alter its shareholder agreement or articles of association. This amendment may incorporate specific conditions or waive particular provisions regarding the rights linked to nil-paid shares.

When are Nil-Paid Shares Payments Due?

Unpaid shares payment may never be due; it mainly depends on why they exist and if the company specified their payment terms during their issue.

If the deferred payment agreement exists, the shareholder must make the payments to the company by the dates specified in the agreement or upon selling the shares to another party or returning them to the company.

Another instance where an individual may need to pay for the shares is when the company is facing financial challenges, is wound up, or needs to raise capital. In such cases, a director may issue a “call on” notice to shareholders requesting them to pay the outstanding funds due on unpaid shares on a specific date.

According to the Companies Act 2006, companies can receive "non-cash consideration" as shares payment. Non-cash consideration consists of any form of payment other than cash, such as:

1. Goods
2. Property
3. Services
4. Assets (including shares in another company)
5. Expertise
6. Forgiveness of debt

After complete payment of unpaid shares, the shareholders hold no additional financial responsibility to the company due to their share ownership.

Can a Company Allot Fully Paid and Unpaid Shares at the same Time?

Yes, a company can allot fully paid and nil-paid shares simultaneously if the shareholders' agreement or articles of association don't restrict it upon or after incorporation.

The Models article of association stipulates all shares issued must be paid fully. So, if your company wants to allot unpaid shares, you must amend the relevant provisions in model articles to allow the allotment of unpaid shares.

Additionally, additional provisions must be added to the new articles to explain how unpaid shares should be treated.

Partly Paid vs. Fully Paid Shares

Partly paid shares are shares where member initially contribute a portion of the share price, with the remaining amount to be paid gradually on the later date. This allows members to acquire the shares without paying for their shares in full. They can pay the outstanding balance in instalments or as per company policy.

On the other hand, fully paid shares are when a member pays the shares' full value to the business during the share issue process.

When Unpaid Shares Become Partly or Fully Paid

Whenever the status of unpaid shares changes to partly or fully paid as a director, you must update it in the company's statutory register. You may also need to issue the members a new share certificate.

You should also update any unpaid shares changes to your following confirmation statement to remain compliant and ensure the Companies House public register is updated.

Reporting to the Companies House

Every limited company should report the issued shares as unpaid, partly paid, or paid through Form SH01 within one month of the allotment occurring. This form requires these details:

1. Shares Issue dates
2. Company name
3. Company registration number
4. The currency and category of the assigned shares
5. The quantity of shares being allocated, along with their nominal value and the paid/unpaid amount

This form also includes the statement of capital, which summarizes the company's share capital.

Can I Transfer Nil-Paid Shares?

You can transfer nil-paid or partly-paid shares to a new member if the company's article of Association doesn't restrict it.

The new shareholder will be liable to pay the remaining amount of the nil-paid shares.

Usually, shares are transferred using a J30 stock transfer form, but you will use a J10 stock transfer form if shares are unpaid or partly paid.

When using the J10, you must fill in the following information:

1. Consideration (amount the shares are sold for)
2. The class of shares to be transferred
3. Company name where shares are being transferred
4. Number of shares to be transferred
5. Name and address of the seller (transferor) and the buyer (transferee)

The primary difference between the J30 and J10 stock transfer forms is that J30 requires the seller's signature only, while J10 necessitates the buyer's and seller's signature.

Form Your Limited Company with Incorpuk Today

At Incorpuk, we will help you through the company formation process and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

Final Thought

Nil-paid shares are shares that members have yet to be paid any amount. Issuing these shares to members can be advantageous in several ways. For example, when a company hasn't opened a bank account yet, or members don't have money for the shares immediately.

A nil-paid shareholder pays the outstanding amount when requested by the company when it has financial challenges or is winding up. They can also pay for the unpaid shares by the terms governed by the company's articles.

Companies should also adhere to Companies House regulations by, timely submitting Form SH01, in the next confirmation statement for legal compliance and transparency. If you have any questions on Nil-Paid Shares in a Limited Company, don’t hesitate to contact us here, and we’ll do everything we can to help.