Shares that were never properly allotted

Most defective share issues can be put right without going to court: the Companies Act 2006 says an allotment made without the directors’ statutory authority is still valid, so the usual fix is a members’ resolution ratifying what the directors did, fresh authority for the future, and late filing of the SH01 and register entries. Court rectification under section 125 is needed mainly where it is unclear whether an allotment happened at all, or where the people involved disagree about who owns the shares.

What can go wrong with an allotment?

A properly made allotment of new shares usually involves several separate steps, each with its own rule. The common defects found on due diligence, at a sale or when a new accountant takes over are:

• No authority to allot. Under section 549, directors must not allot shares except under section 550 (a private company with only one class of shares, unless its articles prohibit it) or section 551 (authority given by the articles or by resolution). A company with two or more classes, or which is creating a second class, needs section 551 authority.
• Pre emption rights ignored. Section 561 requires new equity securities to be offered first to existing ordinary shareholders in proportion to their holdings, unless the right has been excluded or disapplied. See pre emption rights.
• A new class created without its rights being set. Under the model articles for private companies, article 22(1), the company may issue shares with rights or restrictions determined by ordinary resolution, subject to the articles.
• Filings missed. Section 555 requires a return of allotment (form SH01) within one month, and section 554 requires the allotment to be entered in the register of members within two months.
• No real decision. There is no board minute or written resolution, or the shares appear in the register or on a confirmation statement without anyone having agreed to issue them.

Is a defective allotment void?

Usually not. Section 549(6) says nothing in section 549 affects the validity of an allotment or other transaction. So shares allotted without section 551 authority are still validly issued; the consequence is that a director who knowingly contravened, or permitted or authorised the contravention, commits an offence under section 549(4), punishable by a fine.

A breach of pre emption rights also does not undo the allotment. Instead, section 563 makes the company and every officer who knowingly authorised or permitted the contravention jointly and severally liable to compensate anyone to whom an offer should have been made, for their loss, damage, costs and expenses. Proceedings must be brought within two years of the return of allotment being delivered to the registrar.

The harder case is where it is doubtful whether an allotment took place. Section 558 says shares are taken to be allotted when a person acquires the unconditional right to be included in the register of members in respect of them. If nobody ever agreed to issue the shares, and no one acquired that unconditional right, an entry in the register or at Companies House may be recording something that never happened.

How do members ratify what the directors did?

Allotting shares without authority is also a breach of the directors’ duty under section 171 to act in accordance with the company’s constitution. Section 239 governs ratification of a director’s breach of duty. The decision must be made by resolution of the members. If it is proposed as a written resolution, the director concerned (if a member) and any member connected with them are not eligible members. If it is proposed at a meeting, it passes only if the necessary majority is obtained disregarding votes in favour by that director and connected members. The detail is covered in ratifying directors’ breaches.

Section 239(6)(a) preserves the validity of a decision taken by unanimous consent of the members. In a small company where every shareholder signs, the ratification is on the firmest footing.

Ratification deals with the past. For any further issues, the members should give proper authority. Under section 551(8) a resolution to give, vary, revoke or renew authority may be an ordinary resolution even though it amends the articles. Section 551(9) applies Chapter 3 of Part 3 to such a resolution, so a copy must be sent to the registrar within 15 days under section 30. The authority must state the maximum number of shares and an expiry date no more than five years ahead (section 551(3)).

What about pre emption problems?

The only statutory remedy for a pre emption breach is compensation to the people who should have received an offer, and only for two years after the SH01 was delivered. Where those shareholders confirm in writing that they accept the allotment and waive any claim, the practical exposure falls away. For future issues, a private company can exclude pre emption in its articles under section 567, or the directors can be given power to disapply it by the articles or special resolution under sections 569 and 570.

How do you catch up the missing filings?

Once it is clear an allotment did happen, the records should show it as it happened:

1. Write up the register of members with the allotment, showing the actual date the shares were allotted. Section 554 required this within two months, and failure is an offence by the company and every officer in default.
2. File the SH01 with the actual allotment date and a statement of capital, as explained in form SH01. Default under section 555 is an offence by every officer in default under section 557. Section 557(3) allows a person liable for the default to apply to the court to extend the time for delivery, if the omission was accidental or due to inadvertence, or it is just and equitable to grant relief.
3. If a new class was created or renamed, deliver a notice under section 636 within one month of assigning the name or designation.
4. Send the registrar copies of any special resolutions, or ordinary resolutions to which Chapter 3 of Part 3 applies, within 15 days under section 30.
5. Issue share certificates and check that the next confirmation statement agrees.

Do not backdate the resolutions themselves. A ratification resolution should carry the date it is actually passed and describe what it is ratifying.

When does it have to go to court?

Section 125 lets the person aggrieved, any member or the company apply to the court where the register of members does not include information it is required to include, or includes information it is not required to include. The court may refuse the application or order rectification and payment of damages by the company. It can decide any question of title between members or alleged members, or between them and the company. Where the company sends lists of members to the registrar, the order must direct that notice be given to the registrar. See rectifying the register of members.

Court is typically needed where people disagree about whether shares were issued, to whom, or whether they were paid for. Companies House guidance says it will remove information where it is satisfied a document records a transaction that never occurred, but may suggest the court is better placed where the transaction is complex, its legality is unclear or third party rights such as investors’ are affected. Under section 1096 the registrar must remove material derived from anything a court has declared invalid, ineffective or done without the company’s authority. That route is covered in removing wrong information from the register.

What does a repair look like?

Illustration only. A company has 100 A ordinary shares held equally by two founders and 20 B shares held by an investor. In 2024 the founders, as the only directors, allotted 10 new A shares to a key employee. There was a board minute but no section 551 authority, the B shareholder was not offered anything, no SH01 was filed and the register was not updated.

• The allotment is valid despite the missing authority (section 549(6)).
• The B shares need checking: pre emption under section 561 applies to holders of ordinary shares, so whether the investor had a right depends on whether the B shares fall within the company’s ordinary share capital and on what the articles say.
• The members pass a resolution ratifying the directors’ breach. Because the founders are both directors and members, their votes in favour are disregarded under section 239 unless all members consent unanimously, so the simplest course is a resolution signed by all three shareholders.
• The company enters the employee in the register showing the 2024 date, files the SH01, and passes a fresh section 551 authority for future issues.

What mistakes make things worse?

• Cancelling and reissuing. Treating a valid but irregular allotment as void and issuing new shares can leave two competing sets of entries and confuse the statement of capital.
• Letting the directors vote through their own ratification. Section 239 disregards the votes of the director and connected members.
• Forgetting the employee angle. Shares issued to staff raise separate tax and reporting questions; see how to allot new shares.
• Relying on the confirmation statement. A confirmation statement showing the shares does not prove they were validly allotted.
• Leaving it until a sale. Buyers’ lawyers will find the gap, and repairs done under deadline pressure tend to be less complete.

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Sources

• legislation.gov.uk: Act 2006 c. 46, section 549
• legislation.gov.uk: Act 2006 c. 46, section 550
• legislation.gov.uk: Act 2006 c. 46, section 551
• legislation.gov.uk: Act 2006 c. 46, section 30
• legislation.gov.uk: Act 2006 c. 46, section 561
• legislation.gov.uk: Act 2006 c. 46, section 563
• legislation.gov.uk: Act 2006 c. 46, section 567
• legislation.gov.uk: Act 2006 c. 46, section 569
• legislation.gov.uk: Act 2006 c. 46, section 570
• legislation.gov.uk: SI 2008/3229, schedule 1

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.