Under new Companies Act

Defaulting companies may be wound-up in 21 days

 A company that defaults in its debt payments may be wound up within 21 days of default under the new Companies Act, an auditor warned.

Sujeewa Mudalige, partner, Pricewater house  Coopers, an audit firm, said on Wednesday, that under the new Act, a creditor who has not been paid by the due date has only to make an application to court to start winding-up proceedings against the defaulting company within 21 days of default to recover his dues.

Speaking at a seminar on the new Act, Mudalige alleged that several quoted companies don't pass the solvency test as prescribed in the Act.

He had brought this to the notice of the Colombo Stock Exchange Director General.

He alleged that four such "insolvent" listed companies were Samuel &Sons,Vanik, Lakshapana Batteries and Blue Diamonds.

On the other hand, two companies which had not passed or were closer to failing the solvency test, but obtained a new lease of life by either reducing its stated capital of by revaluing its assets were Dankotuwa Porcelain and Galadari Hotel respectively.

Mudalige further said that under the new Act, companies that don't pass the solvency test are liable to be dissolved. He said that the purpose of the solvency test is to ensure that the rights of the creditors are protected. A company is insolvent when its liabilities are greater than its assets.

The solvency regime is to ensure that financial transactions don't go beyond one's capability.

The first solvency test in the Act is "can you (company) pay dividends" and if the company fails that test, whether it can pay one's debts, he said. Lower the company's solvency ratio, greater the probability of default.

"Solvency" crops up almost everywhere under the new Companies Act, holding the directors responsible for any misdemeanour, Mudalige said.

The definition of a director is much wider under the new Act. The new Act gives freedom for the directors to do what is good for the company, "but if you go wrong you will be crucified," warned Mudalige. Directors' duties and responsibilities are defined in the new Act.

A company director who is of the view that the company is unable to pay its debts (failed the solvency test) as they fall due, shall call for a board meeting to discuss whether an application should be made to court for winding up and for the appointment of a liquidator or an administrator. This is to stop the company from bleeding, he said.

"Solvency test is like the warning bell, if you (director) feels that the company cannot meet its debt, ask for a winding-up order," said Mudalige.

 Dr Harsha Cabral (PC), member, Company Law Advisory Commission, and the other speaker at this event said that the solvency test is the golden thread that runs through the fabric of the new Companies Act.

Mudalige said that a director under the new Companies Act is guilty of an offence if there is a serious loss of capital in the company.

This is because credit is given to a company on the basis of its share capital.

Cabral said that if a director's negligence was the cause of a serious loss of capital of a company, he can be charged for criminal negligence.

 Mudalige said that an example of a company that bled to death was Pramuka.

Pramuka's losses first saw its entire share capital wiped out. And, while continuing further with its operations, it couldn't meet its debt, "continued further and wiped out the deposit base," he added.

Mudalige said that under the new Act, solvency certificates will have to be given by the directors as well as by the auditors. Auditors sometimes charge a higher fee to issue a solvency certificate rather than for an audit, he said.

 Such certificates may be displayed on the companies' annual reports or may be used to obtain bank loans. Solvency certificates ensure the greater transparency of an organization.

Cabral said that the new Companies Act lays the onus on a director to be alert and to be on the ball.

There are no shadow directors, working directors, non working directors, executive directors or non-executive directors under the new Act. All are classified as directors and share equal responsibility and are equally liable.

"All the directors need to be on the ball, being a director is no more doing only the cocktail circuit," said Cabral.

This role is even more serious if it's a listed company because then, public funds are involved.  The onus on the director is to act in good faith, in the best interest and not to be reckless or negligent.

Section 190 however provides a shield for directors, in that they can rely on the expertise of third parties, such as lawyers, accountants or tax consultants, but there needs to be documentary evidence so that the directors' acts are protected in such instances.

Section 218 provides directors to have recourse to indemnity or insurance cover against acts of omission or commission.

Sections 190 and 218 are the two shields for directors with 218 being the bigger shield, he added.

Mudalige said that there was no par value of shares under then new Act, but only fair value.

On success of $ 500 mn. bond issue

Rupee gains 80 cts.

The rupee continued to make gains on the back of reports that the government has been successful in selling its US$ 500 million bond issue last week.

The rupee gained by 30 cents over the US dollar on Friday (over Thursday's closing) to finish the week at Rs. 112.70, market sources said. It has gained by 80 cents over the dollar in the past week, they added.

As a result of the successful sale of the dollar denominated bond issue, upward pressure on interest rates is also seen to be slackening, the sources said.

Overnight, inter-bank call rates were hovering around 15% on Friday, down by 600 basis points from the previous Friday's high of 21%. The Central Bank (CB) through its overnight reverse repurchase window injected a nominal Rs. 500 million to the market on Friday at a concessionary interest rate of 12%, in contrast to the Rs. four billion it injected the previous day.

On Wednesday it injected a further Rs. one billion, on Tuesday Rs, three billion and on Monday Rs. four billion, bringing its total for the week to Rs. 12.5 billion.

Pressure on interest rates is easing because there is a perception in the market that the government will now not to have to borrow from domestic sources to meet its liquidity requirements as the dollar bond issue is through, they said.

"However, we don't expect yields on treasury bills/ bonds to drop by more than 50 basis points because still the liquidity situation in the market is tight," the sources said.

The government is expected to sell these bond dollars in the market for rupees to meet its borrowing requirements thereby relieving pressure on the exchange rate.  This action will be done through the two state banks, the sources said.

And, in addition, the CB is expected to buy these dollars from the market to boost their reserves, the sources said. In turn, they would release rupees to the market, thereby increasing money supply.

This will then ease pressure on interest rates, the sources said. Further, with the market being liquid, players will invest their surplus on treasury bills and treasury bonds, thereby easing pressure on interest rates, they added.

The CB has been selling dollars in the market in the past three months to stabilize the rupee.

They are now expected to buy back these (bond) dollars that will come to the market through the commercial banking system.

Meanwhile, the bourse recorded a healthy Rs. 514.7 million turnover on Friday though market indices remained stagnant over Thursday's closing figures due to profit taking.

However, the sources expected the bourse to be bullish this week because of investor interest in selected stocks, namely Touchwood, and also Peoples' Merchant Bank (PMB) and LOLC.

It were these three stocks that drove the market up last week and with LOLC gaining a 29% stake in Touchwood, there is a perception that it will be able to take this controversial forestry company to a new phase, the sources said.

Galleon, a foreign fund controlled by Sri Lankan born but US based Raj Rajaratnam and Lionhart Investments, another foreign fund, had also been active in the market collecting equity stakes in the afore-mentioned stocks

Hanjin's bid in South Port Terminal project

Hanjin Korea's bid for the building of the first Colombo South Port terminal which was earlier rejected by the technical evaluation committee has been reinstated after the failed bidder went to court on Monday.

A total of five bids were received for the building of this terminal under the Colombo South Port Expansion project on a build, operate and transfer basis (BOT) when bids opened recently.

They were from Port of Singapore Authority (PSA) with Aitken Spence; CMA/CGM with Hayleys-Carson Cumberbatch; John Keells and SAGT with Westport Malaysia; Hutchison Port, Hong Kong and Hanjin.

The concessionary period is 35 years, after which the terminal will be transferred to the state owned Sri Lanka Ports Authority (SLPA).

 Originally three bids  passed the technical evaluation process.

They were PSA, Hutch and CMA/CGM-with the latter passing the technical evaluation process by a mere half point, knowledgeable sources said.

However, the two technically disqualified bidders, Westport and Hanjin, went to court and were successful in seeking re-dress. Spence's attempt to get Hutch out of the reckoning by going to court on the grounds that Hutch was involved in anti-competitive practices in other markets also failed.

Knowledgeable sources said that it will take a couple of weeks to select the successful bidder for the construction of the first terminal under the Colombo South Port Exapnsion project. The breakwater under this project is to be constructed with ADB aid.

One of the key aspects in the financial evaluation process which is now underway under this terminal project is the minimum throughput guarantee payment (royalties) that the successful bidder will pay to the government during the period the company operates the terminal, the sources said.

 Some estimates put the cost of building this terminal at $ 450 million.

Gayathiri at design show

"Good design is good business", famously quoted by Thomas J. Watson Jr, CEO, IBM provided the inspiration for the theme at Kyoorius Designyatra 2007: 'Design Empowers Business'. Held in Goa, India in September this year, Designyatra brought together over 2,000 participants from around the globe.

Identifying the importance of bridging the design industry with businesses, GH Resources was the only Sri Lankan advertising agency present at this year's design fest. "Attending Designyatra was a good decision. Making us look at new creative design and to use our talents as tools to empower our clients' businesses," said GH Resources Managing Director Gayathri Hanwella.The design fest also created a knowledge-sharing platform which created a hotbed for sharing ideas, innovations and avenues for collaborations.

The annual design event cum conference featured top notch designers and creative heads such as Kyle Cooper who has directed over 150 film title sequences and is famed for 'almost single-handedly revitalizing the main-title sequence as an art form.' Stefan Sagmeister (USA)-graphic designer and typographer and Wally Olins (UK), practitioner of corporate identity and branding. Others included Harry Pearce (UK), Neville Brody (USA), Paul Belford, Michael Johnson  and, David Kester all from the UK, Erik Kessels (Netherlands) and Simon Sankarayya (UK).

GH's client portfolio includes Barefoot, Rithihi, Villa Saffron, Sifani Jewellers, Colma, Nestle, Logiventures, No. 18 Restaurants, ACX couriers, Watawala Plantations, Prime Destinations, FJ & G de Sarams, GTZ,  Overseas School  Colombo and Ceylon Asset Management.

With JWT as a stepping stone, Hanwella moved on to Unilever as a Brand Manager. Thereafter, she joined Masters Advertising as an Account Director managing brands and supervising new business.

Short term yields fall 21 bp

The weighted average yields (WAYs) of  91 day treasury bills at Wednesday's auction fell by 21 basis points to 18.25% over the previous week's closing figure.

This "short term tenure" auction had bids for Rs. 18,766 million of which only Rs. 4,500 million was accepted from the market.  Meanwhile, the WAYs for 182 day and 364 day bills remained unchanged at 17.54% and 17.39% respectively.

This auction was for the re-issue of Rs. 11,141 million worth of maturing treasury bills of which. Rs. 4,795 million were accepted from the market and the balance Rs. 6,346 million retired.

4 from LOLC to TIL

Touchwood Investments Ltd. (TIL) with the recent equity partnership with LOLC has appointed Mrs. Rohini Nanayakkara as TIL Chairperson together with three other LOLC Board directors to the TIL Board namely, Ishara Nanayakkara, Kapila Jayawardene and Ms. K U Amarasinghe.

Expenditure up Rs. 48.7 bn.

Government expenditure and lending minus repayments in the first seven months of the year increased by Rs. 76.3 billion (9.8%) to Rs. 462.6 billion when compared with the corresponding period last year.

This comprised a current expenditure figure of Rs. 354.1 billion, a Rs. 48.7 billion (15.9%) increase and a capital and lending minus repayments figure of Rs. 108.5 billion, a 34.1% increase when compared with the corresponding period last year.

Meanwhile, the total budgeted expenditure and lending figure assigned for the year is Rs. 898 billion. Of this figure, the government, as at end July 2007 has met 51.5% of this target, while, in the breakdown, in regard to its current expenditure target, it has met 59.4% of this figure, but in the case of its capital and lending minus repayments figure, it has met only 36% of this target.

Source: Central Bank

Self-employment drive

Coca-Cola Sri Lanka (CCSL) recently presented mobile selling carts to youth identified under the "Tharunyata Hetak" programme initiated by President Mahinda Rajapaksa's son Namal to alleviate illiteracy and unemployment among Sri Lankan youth, said a statement.

Each vendor will have the capacity to generate an average monthly income of SLR 10,000.

While each cart will sell Coke, they will also have the capacity to sell fast moving consumer goods such as lunch packets and food snacks. The beneficiaries were chosen through the Colombo Municipality, and 23 have already received their carts.

The mobile selling units are virtual shops on wheels. Each unit is built as a push cart, complete with display racks, storage space for 48 bottles of beverages and refrigeration space as well.

In the past the Company spearheaded two nation wide self-employment drives by way of establishing a mini distributor network comprising 167 distributors to date, which uplifted the lives of over 1,300 people through added income generation.

 In 2006 following the aftermath of the December 2004 tsunami, CCSL embarked on Project Reach, a back to business initiative which gave over 800 back to business opportunities to retailers and boutique owners living along the coast of Sri Lanka.

Over 100 foreign students at ACBT

By Ranee Mohamed

Life teaches us many lessons, but the finest of them all is taught by Australian College of Business & Technology (ACBT)-that correct educational guidance is a must for success.

 Students at ACBT come from a variety of social backgrounds, where 10% of the student population are international students, mainly comprising of students from Malaysia, China and India.

Its student population is more than 1,100.

 This campus, with its wealth of professionally qualified lecturers who have had an exposure to international education, offers an education that seems moulded particularly for the Sri Lankan student.

Hence it's no wonder that not only are there students from Colombo, its suburbs and Kandy, but foreign students from other parts of  Asia, diligently following ACBT's Australiandegree programmes.

"Australia provides a unique learning environment. Their system enables the student to think individually and independently. Australia is a dynamic and vibrant country with a great deal to offer international students. Choosing to come to Australia to study will provide you with new and wonderful opportunities and experiences and a whole new view of the world, not to mention exciting and progressive world-class education programmes, said ACBT Marketing Manager Pubudu Alahakoon.

Australia is an increasingly popular study destination with international students from across the globe. For many students, Australia may represent a better study destination than other popular alternative destinations because Australia is a safe and welcoming place to live, standardized national system of  qualifications, better value for money, low cost of living and globally-recognized courses and qualifications.

"ACBT is a leader in providing Australian university education in Sri Lanka," said Alahakoon. Over 400 students have completed their  Australian degree programmes in Sri Lanka and are today employed in national, international and multinational institutions. And also more than 3,000 students have gained access to many Australian universities after studying "part" of their degrees at ACBT.

ACBT has linked up with Edith Cowan University (ECU) Perth which is an Australian Government owned university.

"We present students the unique opportunity to study for the ECU internal degree in Sri Lanka. A Colombo based ACBT student is no different from a Perth based ECU student. ACBT students have direct access to the ECU online library facilities as well as being issued ECU identity numbers.

The ECU is a responsive and forward-thinking institution that provides well-designed academic programmes in course and research and is noted for innovation in course content, research, creative pursuits and its contribution to the community and of course the government and/or the corporate sector as the case may be.

 In the 2006 Australian Good Universities Guide to MBA and Executive Short Courses, the ECU Business Faculty was awarded a 5-star rating in the category of Academic Qualifications for its MBA programme and a 4 star rating form the Graduate Management Association.

The international degree programmes offered at ACBT guarantees a successful professional life for every student.

With ACBT's fine educational planning there is always a choice. One could either directly be a part of a specific degree programme after the advance level exam or complete the 8-month foundation course after ordinary level examination which is equivalent to the advance level and is recognized by the Australian government in order to quality for a particular degree programme.

Thereafter a student can earn a universally recognized Edit Cowen degree within 2 to 3 years in Sri Lanka or transfer to over 27 Australian universities which includes ECU, RMIT, Monash, Deakin, Curtin , Latrope University.

ACBT is a fully fledged campus. It is a student's dream come true, with air conditioned classrooms equipped with mounted projectors, wi fi in selected areas, a students lounge, a stacked library, laboratory facities and access to ECUs online library.

 The cherry on top? The 'Aussie Caf‚' on the rooftop with a sea view, open from 8am to 8 pm.

ACBT's pay as you learn scheme is evidence of its non-mercenary trends.

Students can also pay monthly or per semester and ACBT facilitates for loans for needy students.

"This is an opportunity which we have never heard of in the yesteryears and has been made possible only by ACBT. It is ACBT's conscientious planning and programming that has enabled students in Sri lanka to acquire a world renowned degree here in Sri Lanka for one fifth of the cost which would have otherwise been required if one were residing in Australia. Sri Lankan MBA aspirants now have the opportunity to obtain an MBA which has been voted as one of the top academic programmes in Australia offered by the Post Graduate Institute of ACBT and conferred to the student by the much acclaimed ECU.

Alahakoon pointed out that the Master Of Business Administration (international) is designed for graduates from a variety of disciplines who wish to acquire a knowledge and understanding of business operations and environment.

 "It also equips them with the conceptual and analytical abilities needed for decision making at the highest level.

 The programme is strongly linked with the business community and is designed around the real needs of the sophisticated technological and fast changing business world," he said.

Students who are weak in the English Language are also offered special assistance and free English programmes to enhance their language skills-ACBT students have been presented with a host of employment benefits where most of them have been grabbed by the industry even before completion of their courses; this has been mainly due to the quintessential academic environment provided at ACBT which moulds students into becoming well seasoned employable material," said Alahakoon.  "We are confident and established, yet ACBT being the hallowed institution that it is  always on the path to better ourselves.

We are reaching out to the best in international education, and the peak is but a breath away," said  Alahakoon who invites students to come study what is on the board for their next Semester beginning late October.

Legal developments in financial services

Taking the lead in promoting and sharing best practices in the financial sector, HSBC  will sponsor a conference on Legal Developments in the Financial Services Sector, said a statement.

 The conference, organised by the Ceylon Chamber of Commerce (CCC), will be held at the Galadari Hotel, Colombo from October 23-24.

The objective of the conference is to educate CCC members with regard to the implications of recent regulatory changes and legislative reforms and to broaden the understanding of concepts and principles of law applicable to banking, finance, leasing and insurance sectors.

 Eminent personalities in their respective fields are slated to participate in the conference which will provide a dynamic forum in which to exchange ideas and information on this crucially important area of business.

The conference will focus on Corporate Governance Standards introduced by CSE, Impact of the Companies Act on the financial sector, Implications of the new Accounting standards introduced by ICASL on the banking, leasing and insurance sectors and BASEL 11-Developments and compliance.

"As a bank that believes in  adherence  to the legal and ethical framework of the countries in which it operates, HSBC is pleased to sponsor the Conference on Legal Developments in the Financial Services Sector," an HSBC spokesman said.

"We believe that being constantly updated on the legal developments in the financial services sector is essential to all players in the industry."

Bonus shares possible under new Companies Act

By Suresh R.I. Perera*

The introduction of the new Companies Act launched the local commercial community into a debate as to whether the issuance of bonus shares is possible under the new Act. Legal opinion on this issue is divided resulting in the commercial community blaming the legal profession for confusing what used to be a simple issue. Perhaps this is the biggest controversy to face the history of company law in Sri Lanka. 

This controversy has arisen largely due to erroneous assumptions of principles of  company law. This article points out that according to Authorities on Company Law, bonus shares are issued for a consideration and concludes that Parliament has intended to issue bonus shares under the new Act.

 Article also sheds light on the misconstruction of the interaction  between Sec. 47 & Sec. 48 of the New Zealand Companies Act of 1993 which is the origin of the confusion.

The term "bonus shares" is misleading. Authorities such as 'Charlesworth' point out that the proper term should be "capitalization" or "script issues."  "When a company capitalizes its distributable reserves, it reduces at a stroke its accumulated realized profits available for dividend and issues in their place to existing ordinary shareholders in proportion to their holdings shares or loan stock credited as full paid up.

From an accounting view point, the distributable reserves figure in the balance sheet is reduced and the share or loan capital accounts increased by an equivalent offsetting amount. As a result, other things being equal, the net effect on the value of an individual's holding in the company remains unchanged. The term used to describe such issues as bonus issues  is therefore misleading, and more appropriate descriptions are "capitalization," "scrip" or "script  issues" (Charlesworth's Company Law  -13th edition , page 604).   

Judges who have decided cases involving bonus shares such as C.I.T v Macan Markar (1 CTC 154), I.C.R v. Blott (8 TC 101), Bouch v. Sproule ([1887] 12 AC 385), Swan Brewery Co. v King ([1914] AC 231) and IRC v. Wright (11 T.C. 181)-refer to the process of capitalization of reserves as bonus shares.

 Whatever the terminology is apt for this, this Article uses the term 'bonus' to denote the process of issuance of shares pursuant to transfer from reserves or profits to the Stated Capital (or share capital).

The basis of contention that issue of bonus shares is not possible under the New Act:

Section 51 read in conjunction with section 52 of the Act empowers the Board of Directors (BoD) to issue shares and prior to issuance of any shares, the BoD is obliged to decide the consideration for such shares which should be fair and reasonable to the company and all the existing shareholders.

In the context of the aforesaid statutory provisions some argue that issue of bonus shares is not possible under the new Act based on the erroneous premise that bonus shares are free shares or a free gift from the company. Therefore directors are unable to issue bonus shares due to the absence of consideration for such an issue. Furthermore it has been pointed out that Sec.48 of the Companies Act of 1993 of New Zealand provides an exception to the requirement for consideration stipulated in Sec. 47 for issuance of bonus shares and in the absence of such a section in our Act bonus shares cannot be issued in Sri Lanka. Therefore this article also addresses the misinterpretation of the New Zealand Act.    

Bonus shares

Bonus shares are issue for a consideration and not gratuitously:- There is a common erroneous notion that bonus shares are not issued for a consideration. Authorities on Company Law reject this erroneous notion. The following extract from Pennington's Company Law- 8th edition, page 521 shows that bonus shares are issued for a consideration: "New shares, debentures or debt securities issued in this way on a capitalization of profits or reserves are known as bonus shares or debentures, but the name is misleading in that it implies that they are gift from the company. If they were issued gratuitously, they would not be paid up at all, and in the case of bonus shares, the company could call on their holders to pay for them in cash. In fact bonus shares or debentures are not issued gratuitously because their nominal value is paid in full or in part by the capitalized profits or reserves of the company which could otherwise have been distributed to the shareholders as a cash dividend or in the case of unrealized profits, retained as reserve.

On the other hand, since no cash dividend is declared, bonus shares are not paid for in cash by the shareholders to whom they are allotted because there is at no point of time any debt owing to such a shareholder by the company with which he can satisfy his liability to pay for the shares.

Consequently, an issue of bonus shares must be treated as an issue for a consideration other than cash and an appropriate and written contract for the allotment must be delivered to the Companies Registrar.." 

Thus Authorities on Company Law clearly point out that the process of capitalization of reserves is the consideration of the issuance of bonus shares and bonus shares are not issued gratuitously. Pennington points out that bonus shares are issued for 'consideration other than cash'. Section 58(2) of our new Act refers to this concept. It is noteworthy that Pennington makes this statement upon due recognition of the fact that 'at no point of time is any debt owing to such shareholder' in the case of the issuance of bonus shares.

Assets

Hence Pennington recognizes the fact that all reserves form assets of the company until they are legally distributed by the company. Notwithstanding this Pennington says that bonus shares are issued for consideration other than cash.    

Ranking & Spicer's Company Law 10th Edition (Wilson and South) page 153 quoting a decided case points out: "The issue of bonus shares as a gift is illegal (Re Eddystone Marine Insurance Co. (1893), 3 Ch. 9), but a company may pay up the nominal value of bonus shares out of capitalized profits.."

Hence this Authority on Company Law too points out that bonus shares are not a gift and is for a consideration as they are fully paid up 'out of capitalized profits.' Thus capitalization of profits forms the consideration for the issuance of bonus shares. 

Whilst Sec. 51 empowers the BoD to issue shares-Sec. 52 stipulates that the BoD should decide the consideration and resolve that in its opinion that consideration is fair and reasonable to the company and all existing shareholders.

Section 52(2) says: "The consideration for which a share is issued may take any form including cash, promissory notes, future services, property of any kind or other securities of the company." This is an inclusive definition and not an exhaustive one. For the purpose of the Company's Act, bonus shares are certainly issued for a consideration and not gratuitously as Company Law authorities have pointed out.

Bonus Shares are 'fully paid up': Palmer's Company Law 21st edition page 191 points out that "Shares issued for past consideration or by way of a gift cannot be treated as paid up and the allottees can be made liable to pay for them. The position is different where bonus shares are issued, because in that case the shares are fully paid up out of profits of the company available for distribution by way of dividend or otherwise available"

 Mayson, French & Ryan on Company Law 15th edition, page 301, too says that "as bonus shares are fully paid up otherwise than cash,.."

Therefore the fact that 'bonus shares are fully paid up' has been established beyond any doubt by the authorities on company law such as Palmer and Mayson.  As bonus shares are fully paid up, the amount capitalized represents the amount received by the company in respect of issue of shares. As such if it is not the company, who else could be the recipient of this payment for issuance of 'fully paid up' bonus shares?

Hence one may observe that the definition of "Stated Capital" is in harmony with the process of capitalization of reserves and issuance of shares.

The definition in Sec. 58 of "Stated Capital in relation to a company means the total of all amounts received by the company or due and payable to the company  (a)  in respect of the issue of shares and in respect of calls on shares."

The definition of stated capital does not say anywhere that the payment should come from shareholders. In fact the word shareholder does not appear at any place in the said definition. By the process of capitalization of profits, the company 'receives' consideration in respect of issue of bonus shares. 

Statutes

N.S. Bindra, on 'Interpretation of Statutes' 8th edition, page 503 says: "It is a well known rule of construction that every attempt should be made to harmonize the different parts of the statute and that each part should be construed so as to expound every other part of the statute.. Same Rule of interpretation is to be applied where two parts of the same statute are in conflict. The sections of an enactment should be so construed as not to be inconsistent with each other. They should be read in such a manner that they are reconcilable with each other. If one part of a statute conveys clear meaning, it is not necessary to introduce another part of the statute for controlling or diminishing efficacy of the first part."

Section 72(3)(b) of the New Act says: ".. an allotment of fully paid shares in the company may be validly made by way of capitalization of reserves of the company, .."

When Section 72(3)(b) clearly conveys the concept of  "capitalization of reserves" and the increase of stated capital by "fully paid up bonus shares," is it necessary or possible to quote Sec. 58 "to" for diminishing efficacy of 72(3)(b)? who else could be the recipient of this consideration for 'fully paid bonus shares'?   

A definition contained in a statute applies only to that statute:  The definition of 'bonus shares' in Sec. 55 of the Securities & Exchange Commission (SEC) of Sri Lanka Act No.36 of 1987 has also been quoted in aid of the proposition that bonus shares are issued gratuitously.  However it is a well accepted Rule of Interpretation that the definition contained in one statute does not apply to another statute. 

The definition given in due statute is for effectuating the provisions of that statute and not for effectuating the provisions of another statute. Definition for expression given in an Act cannot be used for purposes of another Act. (Cibatul Ltd v. Union of India (1980)21 Guj LR 284 (DB)

Where a definition is given in an Act, it should be confined as a general rule to interpret a word defined in that Act only and does not explain the meaning of a word in other statutes.

Maxwell on The Interpretation of Statutes, 12th edition,  page 281 says: "Another reason why the same word or phrase sometimes receives two different constructions is that the sections in which it occurs are derived from two distinct enactments.1"

Bindra's Interpretation of Statutes2 comments on this approach as follows: "It is no sound principle of construction to interpret the expressions used in one Act with reference to their use in another Act. The meaning of words and expressions used in an Act take their colour from the context in which they appear.  To take a word bearing a peculiar meaning in a particular Act and to clothe that word with the same meaning when found in a different context in a different Act is a fallacious process of interpretation. If there are different enactments dealing with similar topics and containing same phrases, interpretation given to one of them can not be relied on for interpreting the other."

Though the word bonus share in the SEC Act has been defined with reference to consideration, the meaning of the word 'consideration' for the purpose of the SEC Act and the Companies Act is not identical. Whilst the word in the context of the Companies Act bears a broader definition, the same word connotes a narrow definition in the context of the SEC Act.  

Value of bonus shares:  When issuing bonus shares the directors have the obligation of determining the cash value of the consideration for a share, ie the amount being capitalized divided by the number of shares to be issued3 and resolving that in its opinion it is fair & reasonable to the company and to all existing shareholders.

Is it fair & reasonable? One may observe that when bonus shares are issued to shareholders by capitalizing the profits, profits are retained by the company and the company could utilize these for further investments. As such there is no unfairness or unreasonableness whatsoever caused to the company by issuance of bonus shares (at the value arrived at by dividing the amount capitalized by number of shares issued). In fact the company benefits as it retains the profits within the company.  

Capitalization at par value under the old Act was carried out simply because it was the lowest value at which it could have been done. Issuance of shares below par value was prohibited under the old Act except with the sanction of a court. Hence the reason for capitalization at par value.

 L.C.B. Gower in his book 'Modern Company Law' 3rd edition,  page 110 says that "There is, it seems, no legal obligation to issue shares at the best price, thereby avoiding the dilution of the value of the existing shares, so long as there is no breach of the directors' fiduciary duties or fraud on the minority."

Therefore the contention that bonus shares should be issued at market value is only a figment of the imagination.

From the perspective of shareholders, as their shares become more readily marketable an advantage is derived by them due to the process. As Gower points out "The only result, from the shareholder's point of view is that his proportion of the capital of the business is now represented by a greater number of shares, each of which is therefore worth less and this may make them more readily marketable.4 "     

A company should file form 6 with Registrar General of Companies to issue bonus shares.

Legislature

Has the legislature intended the issuance of bonus shares? Is capitalization of reserves and issuance of shares possible under the new Act?  If there is an ambiguity it should be resolved by resorting to the universally accepted Rules of Interpretation of Statutes and not by comparison of our provisions against the company law of a foreign jurisdiction.

Intention of the legislature: A fundamental rule of interpretation is that one must seek the intention of the legislature. The dominant purpose in construing a statute is to ascertain the intent of the legislature as expressed in the statute, considering it as a whole and in the context. (Bindra on Interpretation of Statutes- 8th Edition, page 417)   

Has Parliament intended that bonus shares could be issued by capitalizing reserves? Clear words of the intention of the legislature are embodied in Section 72(3) of the Act.

In this section Parliament has pronounced the consequence of bonus shares issued by capitalization of profits in a crossholdings situation. Now could somebody hasten to conclude that bonus shares are not possible under the Act in the context that the legislature has enacted rules regarding consequences of a bonus issue in a crossholding situation? If bonus shares are not intended under the new Act Parliament would not have made any provision for the consequences issuance of bonus shares under cross holding situation. 

Sec. 72(3)(b) of Act No. 7 of 2007 : "Where a body corporate is permitted to continue as a member of the holding company.. , an allotment of fully paid shares in a company may be validly made by way of capitalization of reserves of the company, which share also will have no right to vote." 

Would Parliament enact the consequences of a bonus issue if its intention ever was that issuance of bonus shares was not possible under the Act? Hence the intention of the legislature is too clear for any dispute to arise in this regard, if proper Rules of Interpretation had been invoked in the first instance.

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 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 capitalization 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 in to 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 Statues 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 statue 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 capitalization-Statute or Articles? Normally the power to issue bonus shares on capitalization 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 capitalization of reserves.

Sections 57(5) ad 58(1) provided merely for the issuance of bonus shares out of the capital redemption reserve fund and the share premium account respectively.  A company derived power to issue bonus shares by capitalization of profits from the Articles (Article 129 of table A).  This fact of deriving power from the Articles to issue bonus shares by capitalization of reserves is referred to in Ranking & Spicer with reference to U.K 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 capitalized 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 capitalize profits must be contained in the Articles. Table A contains such a power.. and also authorizes the distribution of shares in other companies by way of bonus.5"

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  memorandums 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 statute6. 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) and shares in lieu of dividends (Sec. 54 ). 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 capitalization 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 with effect from January 30, 2006 (Companies (Amendment) Act 2005)  ie 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: Issue of bonus shares are without consideration and Misinterpretation of the interaction between Sections 47 and 48 of the New Zealand Act of 1993.

Interaction between Sections. 47 & 48 of the 1993 New Zealand Companies Act:-The interaction between sections 47 & 48 of the New Zealand Act has been misunderstood thereby leading to the confusion pertaining to bonus shares. It is a misconception to contend that section 48 provides an exception to the 'requirement of consideration' for the issuance of shares stipulated in Sec. 47 of the New Zealand Act in case of: Capitalization of reserves and issuance of fully paid shares (bonus shares) and consolidation and division of shares, and   sub division of shares (share splits).

A study of the New Zealand Act in fact manifests that bonus shares are issued for consideration, which is a statutory confirmation of the concept elucidated by authorities such as Pennington and Ranking & Spicer, ie bonus shares are issued for consideration even in New Zealand.

Even in New Zealand bonus shares are issued for consideration:  The consideration for issue of shares is defined in Section 46 of the New Zealand Act and includes "other securities of the company" inter alia. The Act incorporates by reference the definition of the term securities as defined in Sec. 2D of The Securities Act of 1978 of New Zealand. This covers the interest of a person to participate in the earnings or property of the company. Thus the process of capitalization of earnings provides consideration for issuance of bonus shares even in New Zealand.

As Section 46 of the New Zealand Act read in conjunction with Section 2D of the Securities Act 1978 says that bonus shares are issued for consideration, the assumption that Section 48 of the Act provides an exception to the requirement of 'consideration' embodied in Section 47 has no basis in law whatsoever.

What then is the function of Section 48 vis a vis Section 47 in New Zealand? Though the contents of Section 52(1) of our New Act has been extracted from Section 47 of the New Zealand Act, a study of the  particular section in the New Zealand Act reveals that it contains many other aspects that have not been brought to our Act. For instance it makes it mandatory for the directors to sign a certificate when issuing shares and deliver a copy thereof to the Companies Registrar for registration and specifies the failure to do so to be an offence attracting a penalty.

However due to the exception provided in Section 48, the BoD does not have the obligation of complying with this procedure when issuing bonus shares in New Zealand. Thus due to the exception provided in Sec.48, the directors do not have to follow the procedural requirements when issuing bonus shares.

 Conclusion: Authorities on Company Law such as Pennington, Ranking & Spicer establish the fact that bonus shares are issued for consideration. Capitalization of the reserves amounts to consideration as bonus shares are always considered "fully paid."

The intention of the Parliament with regard to issuance of bonus shares could be gathered from 72(3)(b) of the Act and the power for capitalization of reserves and issuance of bonus shares should stem from the articles of the company and need not be contained in the Statute itself.

* The author is a lawyer and director-Tax at KPMG, Ford Rhodes, Thornton & Co.

1. For instance under Sec.254A of the Australian Corporations Act of 2001, the term 'Bonus Shares' denotes shares issued pursuant to a 'share split' as opposed to shares issued consequent to a 'capitalization of reserves'.

2. 8th Edition, page 271 , N.S. Bindra's Interpretation of Statutes

3. There is no basis for the contention that bonus shares should be issued at market value under the Act as it is not supported by any decided case law (of binding or persuasive authority) or by authorities on Company Law.

4 13th edition  page 110

5. Ranking & Spicer's Company Law, 10th edition - Wilson & South 

6. Stock Exchange and other specific statutes would also apply.

Supplement