Bonus shares are possible under the New Act

Continued from last week

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 states 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 capitalised 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 capitalisation 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 state anywhere that the payment should come from the shareholders. In fact the word shareholder does not appear at any place in the said definition. By the process of capitalisation of profits, the company 'receives' consideration in respect of issue of bonus shares.

N. S. Bindra, on 'Interpretation of Statutes' 8th edition., page 503 states "It is a well-known rule of construction that every attempt should be made to harmonise the different parts of the statute and that each part should be construed so as to expound every other part of the statute.

The 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 states "an allotment of fully paid shares in the company may be validly made by way of capitalisation of reserves of the company."

When Section 72(3)(b) clearly conveys the concept of "capitalisation 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 and Exchange Commission 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, states "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".

N. S. Bindra's Interpretation of Statutes 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't be relied on for interpreting the other".

Though the word bonus share in the Securities & Exchange Commission Act has been defined with reference to consideration, the meaning of the word 'consideration' for the purpose of the Securities Exchange Commission 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 Securities and Exchange Commission 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, i.e. the amount being capitalised divided by the number of shares to be issued and resolving that in its opinion it is fair and reasonable to the company and to all existing shareholders. Is it fair and reasonable?

One may observe that when bonus shares are issued to shareholders by capitalising the profits, profits are retained by the company and the company could utilise 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 capitalised by number of shares issued). In fact the company benefits as it retains the profits within the company.

Capitalisation 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 the par value was prohibited under the old Act except with the sanction of a court.

Hence the reason for capitalisation at par value. L. C. B. Gower in his book 'Modern Company Law' 3rd edition, page 110 states 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".

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

Has the Legislature intended the issuance of Bonus Shares?

Is capitalisation 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 capitalising 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 capitalisation 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 crossholding 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 capitalisation 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.

To be continued