The Gazette 1977

GAZETTE

APRIL 1977

"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. v. Ropner Holdings Ltd. 1 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. 8 Counsel for the plaintiff Company raised an interesting argument in that case. 9 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." 10 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 . . ." n 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 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. 67

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. 1 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. 2 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. 3 This was of course provided it had sufficient assets left to answer for its share capital after paying those dividends. 4 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. 3 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. 6 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 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. 4. Drown v. 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 1. There are now statutory exceptions to this rule - see Companies Act, 1963, Sections 63, 64, 72-77.