THE DISTRIBUTION OF THE COMPANY’S ASSETSs

An asset is a financial contract or physical object with value that is owned by an individual or a company
which can be used to generate additional value or provide liquidity.1

The assets of a company in liquidation or future. These assets include properties, choices in action to
which the company is or appears to be entitled. Also the following assets are available for distribution.

i. All assets that are realized by the liquidator (after discharge of due dates of the company as may
be sufficient to meet them).
ii. All such assets that may be further realized from the management of the business of the company
as elected by the liquidator.2
iii. All assets that may be recovered in the course of winding up through discoveries made from the
company records and other information.3

Once the creditors have proved their debts in the winding up, according to the Insolvency Rules 1996, the
liquidator must distribute the available remaining assets of the company to those entitled. The property of
the company which is subject to a valid fixed charge must be used first to satisfy the debt which is
secured by the charge. Then, in outline, the order is as follows:4

1. The costs and expenses of the liquidation, including the liquidator’s remuneration;
2. The preferential debts, which are defined by s 386 and Sched 6 of the 1986 Act. These are such
debts as are owed to the Inland Revenue for up to 12 months’ PAYE payments (money which has
been deducted by the company from employees’ wages but not passed on to the Revenue); to the
Customs and Excise in respect of six months’ VAT; to the Department of Health and Social
Security in respect of employers’ National Insurance contributions; and employees who are
entitled to claim unpaid wages for the four month period before the winding up as a preferential
debt (up to a maximum of £800) together with accrued holiday remuneration;5
3. The floating charges. As Re Barleycorn Enterprises Ltd6 shows, an asset which was initially
subject to a floating charge is exempt from the charge in order to pay the costs and expenses of
the liquidation. (Hence the importance of the ability to take fixed charges over certain types of

1
Blacks Law dictionary 8th Edition.
2
Distribution of company assets in liquidation by Chimezie Victor C Ihekeazu
3
Distribution of company assets in liquidation by Chimezie Victor C Ihekeazu
4
Principles of company law page 395
5
Insolvency Act 1986, s 175
6
[1970] Ch 465.
 assets such as book debts.) Further, in Re Portbase Clothing Ltd7, Chadwick J held that ‘assets’
which could be used to pay the costs and expenses of the winding up included property comprised
in or subject to a charge which was originally created as a floating charge, but which had
crystallized before the commencement of the winding up;
4. The unsecured creditors. In the case of certain debts, there is a postponement, so that they cannot
rank pari passu with the ordinary creditors. This applies, for example, to shareholders in respect
of outstanding dividend payments;
5. Repayment of capital to preference shareholders; and
6. Repayment of capital to ordinary shareholders. In a solvent winding up, where there is a surplus
left after the initial distribution, then the company’s constitution will provide to whom the surplus
is to be paid. This is normally the ordinary shareholders.

THE ISSUE OF SHARE PREMIUM

Shares may sometimes be issued at premium. Shares are issued at a premium if they are issued at more
than par or nominal value.8 If a company has a history of good financial performance, it can sell its shares
at a price higher than the face value of the shares. The difference between the selling price and the face
value of a share is what is called share premium. Also it’s important to note that share premium only
arises when the company sells the share. The amount of any premium must be fully paid on allotment if
an issue is in a public company. The amount of the premium is paid into a share premium account. For
most purposes, the share premium amount is treated just as if it were an ordinary share capital. There are
certain exceptions to this principle. They are that the money in a share premium account may be used to
pay up fully paid bonus shares or to pay off the company’s preliminary expenses or to pay up any
commitment or discount allowable on the issue of shares or debentures of the company or in providing for
the premium payable on redemption of the debentures of the company.

There is no statutory rule requiring a company to obtain the best possible premium on an issue of shares
in the way that there is a similar rule to obtain at least the par value and therefore not to issue shares at
discount. Yet if shares are issued at well below the price that they could attain in the market, this may
constitute a breach of directors’ duties.

COMPANY SHARE PREMIUM ACCOUNT AND APPLICATION OF SHARE PREMIUMS

7
[1993] Ch 388
8
Company law second edition page 98
If a company issues shares at a premium, whether for cash or otherwise, the company shall 9

a) If it has not already done so, establish an account to be called the share premium account.
b) Transfer to that account an amount equal to the aggregate amount or value of the premiums on
those shares.

If on issuing share, a company has transferred an amount to its share premium account, it may use the
amount to write off

a) The expenses of the issue of those shares

b) Any commission paid on the issue of those shares.

The company may use its share premium account to pay up new shares that are to be allotted to members
as fully paid bonus shares.

Share premium is a non-distributable reserve. The company can use it only for the purposes that are
defined by the bylaws of that company. It cannot be used for purposes not defined in the company’s laws.
Share premium can usually be used for paying equity related expenses such as underwriter’s fees. It can
also be used to issue bonus shares to the shareholders. The amount of share premium is presented in the
balance sheet as part of the equity capital.

9
Section 386 of companies Act 2015