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GAZETTE
MAY-JUNE
Correspondence
20, Nutley Lane,
Donnybrook, Dublin 4.
THe Editor,
1 6 / 6 / 7 7
-
Law Society Gazette,
Dear Sir,
I refer to the article concerning S. 62 of the Companies
Act 1963 appearing on p. 67 of theApril 1977 issue of
the Law Society Gazette. I will try to explain in as few
paragraphs as possible why I am in difficulties with the
article.
The author refers to the case of Henry Head and
Company Ltd. v. Ropner Holdings Limited (1951) 2
A.E.R. 994, his treatment of which I do not understand.
He sets out to examine the word 'premium' in S. 62 of the
Companies Act 1963 and to try to define the word with
the help of the illustrated case, other cases, legal texts, and
other sources. Firstly he produces very sensible dictionary
meanings. Then counsel in the case, he says, wished to
introduce a further definition (the word in S. 62 thus bring
narrowed) which Harman J. sympathised with but could
not, as a matter of law, follow. The dictionary meaning
states, the author says, increase in value. Translated to
the section this means, I think, a price greater than
nominal value. Counsel suggested it also meant enhanced
value where the asset which the share represents increased
in value. The author takes counsel to task for producing
no authority to back this view and criticises the judge for
giving no reason why he rejects it. To me, this must make
the case unique in the reports. Counsel gives no authority
for suggesting 'X' and the judge gives no reason for
holding 'Y\ Not only that. TTie judge may have liked to
follow counsel but could not. The author then supposes
that the reason for this was that the judge thought he was
widening the effect of the section beyond the limits
Parliament had set. The author then criticises him sharply
for trying to alter the meaning of a Statute and castigates
him for daring to strain the meaning of the words of the
Statute. He furthermore ticks him off, in severe language,
for going outside his sphere of authority to accommodate
counsel.
The author over-emphasises the point concerning the
broader and narrower meanings of the word 'premium' in
the section. For instance, he says that counsel tries to get
the word premium enlarged to include a new meaning,
thus leaving the definition of the word as originally placed
in the section 'narrower'. The section or the Act does not
define the word at all (the author admits this) — see
footnote 13, page 68. Then it was said that the other
words in the section do not either broaden or narrow the
word. Harman J. is said to have given the word a broader
meaning (he gives no reason) and counsel is accused of
narrowing the broader or dictionary meaning. Gower,
Palmer, and Pennington are then quoted to support the
dictionary or ordinary meaning with which the author
agrees. (Incidentally Palmer and Gower slightly disagree
on terminology which may be significant — I do not
know.) Property cases are then quoted in which the word
has been discussed. The author then concludes that
'shares issued at a premium' means 'shares issued at a
price greater than their nominal value'. Counsel is again
berated for trying to narrow the definition and the judge is
94
tried for lending him the slightest support. Finally it is said
that accountants would like to see the word narrowed but
the Jenkins committee will not, quite rightly, have it.
I can only conclude that what Counsel was trying to do
was to restrict the effect of the section and what the judge
was doing was trying to apply the natural meaning of the
words in the section.
Perhaps I may be allowed to paraphrase from the
article Counsels arguments on behalf of Company C.
(presumably) thus:
'S.56 (1948 English Act) says that a company must
treat as part of its capital any premium it receives on the
issue of its shares for cash or otherwise. How can you tell
when a premium has been received by a company? Where
the cash received exceeds the nominal value of the share
the exercise is easy. But where no cash excess is
discernible you must look at the assets involved. But
which assets? In my view one looks at the total assets of
the company excluding the assets acquired in exchange
for the shares. I may call these the company's existing
assets. Only those may be considered because one has to
consider the premium in relation to the state of the
company before it acquired the assets to see if the assets
acquired do in fact result in an enhanced value or
premium. What existing assets had Company C. when it
issued shares to A. and B? None. It was a new company.
Thus, because you have no yardstick by which you can
measure the excess value or premium, no premium has
been received. The section does not therefore apply.'
If I may take , the further liberty of paraphrasing again
from the article the judgment of Harman J. it would run
thus:
'S.56 commences as follows: 'Where a company issues
shares at a premium, whether for cash or otherwise . . . '
The words quoted mean, in my view, that a premium may
be calculated by examining the cash received for the
shares in relation to the nominal value of the shares or,
where this yields no fruit, the direct relation between the
nominal value of the shares issued and the value of the
asset acquired in exchange. In the latter case one
compares the nominal value of the shares against their
real value. One compares like with like. Counsel has
stated that there is no relation at all between the two but
there is and, indeed, must be. The company's existing
assets are not in issue and cannot be put in the scale at all.
Absurd results would follow if they were. The section
bears this out. It applies to 'a company' without any
qualification whatever. This inevitably means that a new
test has been introduced. With the test 'nominal value v.
cash received' a further test 'nominal value v. value of
asset' has been introduced in the section. The former can
be automatically operated, the latter not. The latter may
not always prove that a premium has been received. It will
depend on the circumstances of each case. Here by using
the second test an actual premium has been found to exist
and the premium must be considered as share capital.'
If I have unwittingly put words in the mouth of either
judge or counsel I hope I have not been unjust. I have
tried to follow the case from the article.
This I think is slightly different from narrowing the
meaning of the word "premium" on the one hand and
broadening it on the other. I am not sure that the word
itself was in issue at all. Both judge and counsel appear to
be at one on the word. What they disagree with is the
application of the word to the concepts of excess cash and
increased underlying asset value. When counsel says that