What is a partly-paid share?

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It is common to hear people talk about owning shares or equity in a company but what does that actually mean?  Simply put, a share (sometimes referred to as equity in investment settings) is a portion of ownership of a company.  By acquiring shares in a company, the person becomes a member (commonly referred to as a ‘shareholder’) of the company, thereby granting them benefits and rights associated with the class of share that they subscribe for.  These rights can include the right to vote on issues relating to the company and to a distribution of profits (commonly referred to as dividends).  Generally, when people subscribe for shares, they pay the full price of the share upfront, however, it is possible to receive a share without paying the full purchase price – these shares are known as partly-paid shares.

Partly-paid shares

Pursuant to section 252A(1)(c) of the Corporations Act 2001 (Cth) (Corporations Act), a company has the power to issue partly-paid shares.  At the time of issuing the partly-paid shares, the company can set out the terms on which the shares are issued, including the process by which the company can require the shareholder to make payments towards the price of the share.  This is known as making a ‘call’ on the partly paid shares.

How do you make a call on the partly-paid shares?

Section 254M(1), of the Corpororations Act  provides that a shareholder who holds partly-paid shares in a company is required to pay the calls requested by the company.  These calls must be in accordance with the terms on which the shares were issues.  It is common for the terms of issuing partly-paid shares to set an amount to be paid per call, such as $10,000 per call.

The process of making a call will depend on the terms on which the shares were issued, together with the rules of the company, which are commonly contained in a company constitution and or shareholders’ agreement.  Generally speaking, a call will be made by a notice provided to the shareholder setting out the amount of the call and the date by which the call must be paid to the company.

It is important to note that a common term of any issue of partly-paid shares is the forfeiture of the shares in the event of a failure to comply with the obligation to pay as prescribed.

Liability of the holders of partly-paid shares

When a company is wound up, it is common for the liability of the shareholders to be limited to the amount that they paid for their shares (following the phrase ‘losing your investment’).  However, owners of partly-paid shares need to be aware that they may be called upon in certain circumstances to pay the company the amounts outstanding on their shares in an effort to finance the repayment of creditors or keep the company operating if possible.

Takeaways

Partly-paid shares can be an efficient way for anyone to acquire a shareholding in a company without the need to provide a large amount of capital upfront.  While this method is can be useful, it is important that those who are considering issuing  partly paid shares clearly communicate the terms of issue to avoid a potential future dispute.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Further information about partly-paid shares

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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