The Gazette 1977

GAZETTE

APRIL 1977

ISSUING SHARES AT A PREMIUM - SECTION

62 OF THE COMPANIES ACT, 1963

By William O'Dea, LL.M., Barrister-at-Law,

Assistant Lecturer in Law, U.C.D.

It has been a long established rule of consumer law that

a company may not reduce its capital.

The reason for

this rule is that when a company goes into liquidation it is

to the assets which represent its capital that creditors of

the company must look for repayment of what the

company owes to them. Any dissipation of those assets

would then reduce the funds from which creditors could

be repaid.

The net result would be, of course, that a

company would have, on liquidation, less funds to repay

their creditors, than those creditors had been led to expect

when they risked their money by lending it to the

company (or when they took a risk of another sort such

as, for example, letting the company have goods on

credit). This would be clearly uqjust. If, however, a

company issued shares for more than their nominal value

(e.g. £1.00 share issued for £2.00) then, there was no

objection at common law to distributing the surplus

received over nominal value amongst its shareholders in

the form of dividends.

This was of course provided it had

sufficient assets left to answer for its share capital after

paying those dividends.

The distribution of this sort of

"profit" amongst the shareholders of a company is now, it

is submitted, prohibited by legislation both in Ireland and

in the U.K. The legislation in the U.K. is Section 56 of the

Companies Act, 1948, and in Ireland, Section 62 of the

Companies Act, 1963. The wording of each of those

Sections is precisely the same.

Section 62 deals with the

issue of shares by a company "at a premium". The broad

effect of the Section is that if shares are issued "at a

premium" the excess over the nominal value must be

treated as part of the capital of the company. This means

that such excess can no longer be distributed among the

shareholders as "profits". It will be noticed that I have

used the expressions "issuing shares 'at a premium' and

issuing shares at more than their nominal value"

interchangeably. This is because issuing shares "at a

premium" means issuing shares at more than their

nominal value. The dictionaries are very clear on this.

The question I wish to consider here is whether the

expression issuing shares "at a premium" in Section 62 of

the Companies Act, 1963, means not just issuing shares

at more than their nominal value, but also, in fact,

something more. If the expression issuing shares "at a

premium" in Section 62 means not only issuing shares for

more than their nominal value but also something more

(i.e. if there is an additional element to the definition of

"premium") then, obviously the definition of the word

"premium" in Section 62 is narrower than it seems to be

at first sight.

The expression "shares at a premium" (in Section 56 of

the U.K. Companies Act, 1948) was considered in the

case of

Henry Head and Co. Ltd.

Ropner Holdings

Ltd.

The facts of that case were that Company A and

Company B were amalgamated by the formation of

Company C and by A and B shareholders exchanging

their shares for new shares in C. Company C trans-

ferred 2,000,000 £1 shares to A and B shareholders in

exchange for their shares in A and B on a pound for

pound basis. However, the assets of A and B had been

written down and were, in fact, worth £7,000,000. It was

held that there had been an issue of shares by C at a

premium.

Counsel for the plaintiff Company raised an

interesting argument in that case.

He argued that Section

56 (our Section 62) cannot apply where the issuing

company has no assets at all other than the assets which

it will acquire as the price of the issue of shares.

"Premium", he said, meant something resulting from the

excess value of a company's existing assets over the

nominal value of its shares. Harman J. said he was "much

attracted" by that argument He rejected it, however,

because "It is not stated to be a Section (i.e. Section 56)

which only applies after the company has been in

existence for a year, or after the company has acquired

assets, or when the company is a going concern, or which

does not apply on the occasion of a holding company

buying shares on an amalgamation."

He continued:

"Whether that is an oversight on the part of the

legislature, or whether it was intended to produce the

effect it seems to have produced, it is not for me to

speculate. All I can say is that this transaction seems to

me to come within the words of the Section, and I do not

see my way to holding as a matter of construction that it

is outside i t . . ."

This result, arrived at, may prove, on

analysis, to be quite logical. The reasoning seems

confused, however. Counsel does not seem to be relying

on anything in the Section except the word "premium".

Harman J. confessed himself to be attracted by the

interpretation which counsel sought to put on the word

"premium". Why then does he reject this admittedly

attractive definition by merely saying that the transaction

in this case did not "come within the words of the

Section"? The other words of the Section do not seem to

either narrow or broaden the word "premium". Surely,

then, the more logical approach for Mr. Justice Harman

would have been to examine the word "premium" to

determine whether counsel's suggested interpretation of

that word as used in Section 56 had any validity. Another

way of putting it is as follows. Mr. Justice Harman

thought that the transaction in this case fell within the

words of the Section. "Premium" is one of those words. It

1. There are now statutory exceptions to this rule - see Companies

Act, 1963, Sections 63, 64, 72-77.

2. In

Trevor v. Whitworth

(1887 12 A.C. 409), Lord Herschell said:

"Creditors have a right to rely and were intended by the

Legislature to have a right to rely on the capital remaining

undiminished by any expenditure outside (stated) limits or by

return of any part of it to shareholders." Gower refers to the

capital as the creditor's "guarantee fund" - 1969 ed., p. 111.

3. Because this will not result in reduction of the

nominal

capital.

Drown

Gaumont-British Picture Corporation Ltd.

(1937) 2

AER 609.

5. Section 62 (i) states:

"Where a company issues shares at a premium whether for cash

or otherwise, a sum equal to the aggregate amount or value of the

premiums on those shares shall be transferred to an account to be

called 'the share premium account', and the provisions of this Act

relating to the reduction of the share capital of a company shall

. . . apply as if the share premium account were paid up share

capital of the company."

6. E.g. The Concise Oxford Dictionary, 5th ed., 1964, p. 961,

defines "premium" as follows: "Simply an increase in value",

"Sum additional to interest, wages, etc.", "Bonus". At a premium

— "at more than normal value". Similar definitions to be found in

Oldham's dictionary and Wheeler's dictionary.

7. (1951) 2 AER 994; also 1951 Lloyds Reports 348.

8. Therefore the difference between the nominal value of the shares

issued by C and the actual value of the assets of A and B acquired

(i.e. £500,000) had to be carried to C's share premium account.

9. See (1951) 2 AER 996.

10. (1951) 2 AER 997.

11. (1951) 2 AER 997.