Bonus shares are possible under the New Act

(Continued from last week)

Bonus shares - the interpretation consistent with smooth working of the system to be selected

At present due to the alternate view expressed that bonus shares are not possible under the Act, there is much confusion regarding the issue of bonus shares.

"The Interpretation of statutes" by Maxwell, a well-known authority among lawyers and judges, clearly indicates that if there is a choice between two interpretations, the one that fails to accord with the manifest purpose of legislation must be disregarded.

(Sec. 72 (3) (b) of the Act manifests the intention of the legislature regarding capitalisation of reserves and issuance of bonus shares.) If this issue is subject matter for adjudication on a future date, a court of law should reject the interpretation which introduces uncertainty and confusion into the system, in keeping with the Rules of Interpretation.

During the last few months many companies that sought to issue bonus shares have faced much inconvenience due to the confusion created by the alternate view based on erroneous presumptions.

The Interpretation of Statute by Maxwell - 12th edition, page 45, lays down the rule regarding this.

"If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that parliament could legislate only for the purpose of bringing about an effective result.

Where alternative constructions are equally open that alternative is to chose which will be consistent with the smooth working of the system which the statute purports to be regulating; and that alternative is to be rejected which will introduce uncertainty, friction, or confusion into the working into the system." (Construction ut res magis valeat quam pereat)

Power to issue shares pursuant to a Capitalisation - Statute or Articles? Normally the power to issue bonus shares on capitalisation of profits/reserves need not stem from the Act itself.

Since this an internal matter that could be provided for in the Articles. For instance neither the UK Companies Act of 1948 nor the Companies Act of 1982 of Sri Lanka contained a specific section in the Act to issue bonus shares on capitalisation of reserves.

Sections 57(5) and 58(1) provided merely for the issuance of bonus shares out of the capital redemption reserve fund and the share premium account.

A company derived power to issue bonus shares by capitalisation of profits from the Articles (Article 129 of Table A). This fact of deriving power from the Articles to issue bonus shares by capitalisation of reserves is referred to in Ranking & Spicer with reference to the UK Companies Act 1948 as follows: "The issue of shares as a gift is illegal but a company may pay up the nominal value of bonus shares out of capitalised profits, or out of the Share Premium Account or the Capital Redemption Reserve Fund.

In the last two instances, the power is statutory, but it can only be employed to pay up unissued shares for distribution as fully - paid bonus shares. In the first instance, power to capitalise profits must be contained in the Articles. Table A contains such a power.... and also authorises the distribution of shares in other companies by way of bonus".

It must be pointed out here that the comparison of the New Zealand Companies Act with the new Sri Lankan Act could lead to erroneous conclusions due to the differences in the governing regulatory frameworks.

Companies in both countries are devoid of Memoranda whilst companies in Sri Lanka are governed by the provisions in Companies Act and provisions in Articles of Association, inter alia.

However, in New Zealand companies could be incorporated with Articles as well as without Articles. The latter category of companies would be governed only by the provision of the statute. Therefore, a direct comparison of the New Zealand Act with our Act could lead to incorrect conclusions.

Thus one could see that the New Zealand Act contains more specific provisions that regulate activities of a company such as rules in relation to issuance of 'share options' and 'convertible securities' (Sec. 49), shares in lieu of dividends (Sec. 54) etc. New Zealand contains these specific sections in recognition of the fact that it should facilitate the operation of companies functioning without Articles.

Thus even in the absence of Sec. 72(3)(b), bonus shares by capitalisation of reserves would still be possible under the New Act, provided such power is contained in the Articles.

As the Model Articles of the New Act is not meant to be exhaustive and does not contain such power, a company that adopts Model Articles should ensure to include an Article similar to A. 129 of the First Schedule Table A of the Old Act.

This identical issue arose in Singapore, pursuant to change of its company law regime from par value shares to no par value, by an amendment to its Companies Act from January 30, 2006. (Companies (Amendment) Act 2005) i.e.

Whether in the absence of express power in the Statute bonus shares could be issued - The clarification provided by the Authorities in Singapore is in the website www.sbf.org.sg/download/docs/home and an extract is reproduced below. "The argument is premised on the assumption that express legislative provision is required before a company may issue bonus shares.

We have doubts whether this is correct. It should be noted that nowhere in the Companies Act is the issue of bonus shares prohibited. If so, we do not see why this should not be an internal matter for each company to determine in accordance with Articles of Association."

Bonus shares in New Zealand

The origin of the confusion pertaining to issuance of bonus shares under the new Act could be traced to two erroneous presumptions.

(a) Issue of bonus shares are without consideration, (b) Misinterpretation of the interaction between Sections 47 and 48 of the New Zealand Act of 1993.