Part I. Reduction of capital. The Memorandum of Association. represented by it are sufficient to cover the company's liabilities; and, if the Memorandum is so framed as to enable the company to do so, it may realise and divide among its members as profits any surplus assets which may be really accretions to capital; Lubbock v. The British Bank of South America, 1892, 2 Ch 198 : Verner v. The General &c. Trust, 1894, 2 Ch. 239, per Lindley, L.J. at pp. 265-266; and see International Contract Co.'s case, 17 W.R. 459, per Giffard, L.J.: "The addition of property is no addition to the capital of the company." Such a provision in the Memorandum is unnecessary to enable a company to distribute among its members a reserve fund created from accumulated profits if such reserve fund has not been "capitalised," and the articles give the company power to do so. What amounts to "capitalisation" of profits was considered in Bouch v. Sproule, 12 A.C. 385; Sugden v. Alsbury, 45 C.D. 237 ; and in The Bridgewater Navigation Co., 1891, 2 Ch. 317. The result of these cases appears to be that, until a company has decided that a reserve, created from accumulated profits, shall be permanently added to its capital, such reserve is (subject, of course, to the Articles of Association) divisible as profits among the members of the company. The mere use of the reserve fund as part of the "floating" capital of the company does not amount to capitalisation, but the issue of bonus shares to members paid for out of such reserve fund, coupled with a formal increase of the capital by the amount of such shares, operates as a capitalisation of the accumulated profits represented by the reserve fund; see also Armitage v. Garnett, 1893, 3 Ch. 337. The division among members of a company of a reserve fund created from accumulated profits is therefore not a reduction of capital. A company may not reduce its capital by any process, direct, or indirect, such as issuing shares at a discount, purchasing its own shares, or accepting a surrender of shares, excepting as a means of forfeiture: Ooregum case, 1892, A.C. 125; Welton v. Saffery, 1897, A.C. 299; Trevor v. Whitworth, 12 A.C. 409; Bellerby v. Rowlands &c. Co., 1902, 2 Ch. 14. The statutory provisions enabling a company to reduce its capital with the consent of the Court are Secs. 44 to 56 of the Act of 1903. There is a difference of judicial opinion as to the object of the legislature in making provision for the reduction of a company's capital with the leave of the Court. Sir George Jessel, in Ebbw Vale Co., 4 C.D. 827, indicated his opinion that these provisions were for the purpose of enabling a company The Memorandum of Association. capital. to declare a dividend where but for the power no dividend Part I. would be possible in cases where there had been loss of capital. Chap. 2. In Lee v. The Neuchatel &c. Co., 41 C.D. 1, the Court of Appeal expressed the opinion that it was unnecessary to apply to the Reduction of Court to reduce the capital of a company in order to pay a dividend out of profits where there had been a loss of capital, suggesting that the object of the provisions was not to enable dividends to be paid, but to reduce the nominal amount of the shares, so as to increase the apparent amount of dividend. In Verner v. The General &c. Trust, 1894, 2 Ch. 239, Stirling, J., said: "It is said, and I believe truly, that shares would thus be rendered more marketable. For example: shares in a company with a capital of £50,000, paying dividends at 6 per cent., would, it is said, sell at a higher price than shares in a capital of £100,000 paying a dividend of 3 per cent. I can only say that if this was all that was intended, I can scarcely suppose that the Legislature would have been so ready to interfere." His Lordship, however, accepted the guidance of the Court of Appeal in the Neuchatel case. Doubts were again raised by the House of Lords, in Dovey v. Cory, 1901, A.C. 477, but so far as New Zealand is concerned the necessity for reducing capital in order to pay a dividend is expressly negatived by Sec. 52 of 1903. See chapter on Profits and Dividends infra. The meaning of "capital" in the reduction clauses of the Act includes "paid-up" capital, and the power to reduce includes a power 1. To cancel any lost capital, or any capital unrepresented 2. To pay off any capital which may be in excess of the But the Court has power to sanction any mode of reduction whatever, and there is nothing in the Act which requires the reduction to be spread equally or rateably over all the shares of the company: British &c. Corporation v. Couper, 1894, A.C. 399; The Barrow Hæmatite Steel Co., 39 C.D. 582, at page 594; and see Credit Assurance and Guarantee Corporation, 1902, 2 Ch. 178. The key to the solution of all questions as to reduction of capital lies in remembering that the corporation owes a duty, not to its shareholders only, but to its creditors also: AngloFrench Exploration Co., 1902, 2 Ch. 845. Paid-up capital may, with the consent of the Court, be returned to shareholders on the footing that it may be called up again: Fore Street &c. Co., 59 L.T. 214. Part I. The Memorandum of Association. There is no provision in the New Zealand Statutes corresponding to Sec. 3 of the E. Act of 1880, which provides that accumulated profits may be paid out to shareholders in Reduction of reduction of paid-up capital, the unpaid capital being thereby capital. increased by a similar amount; as to distributing accumulated profits, see Bouch v. Sproule, 12 A.C. 385, and chapter on Profits and Dividends infra. Issue of shares at a discount. A company may without the consent of the Court reduce its nominal capital by cancelling shares which have not been taken or agreed to be taken by any person (Sec. 56 of 1903). Issue of Shares at a Discount. It is settled law that a company has no power to issue shares at a discount, i.e., shares cannot be issued wholly or partly paid up except for a valuable consideration, such as property sold or services rendered to the company, and although the Court will not enquire into the sufficiency of the consideration if the contract for the issue of wholly or partly paid-up shares is not impeached, it will (where there is no such consideration) even after all creditors have been paid, compel the holders of shares issued at a discount to pay up calls to the nominal value of such shares for the purpose of adjusting the rights of contributories inter se Welton v. Saffery, 1897, A.C. 299. It is impossible by any device to absolve the holders of shares issued on terms that they shall not be liable to contribute to the full nominal value thereof, from liability in respect of creditors' claims, unless such shares are issued as fully or partly paid-up for valuable consideration, but shares may be issued on terms that as between the contributories on a windingup they shall have a preferential claim on surplus assets. In Welton v. Saffery, ut sup, at p. 308, Lord Watson said :— "The rights and liabilities, inter se, of the members of different classes of shareholders, in relation to matters which do not concern or affect the interests of creditors, do not appear to me to stand in the same position. I can find no provision in the statute which either expressly or by implication enacts that ordinary shareholders desiring to raise additional capital by the issue of preference shares may not through the company undertake that the sum required to pay creditors in liquidation and the costs of liquidation shall be charged primarily upon the unpaid capital which they are liable to contribute, and that no contributions shall be required from the preference shareholders for the purpose of reimbursing them, or for any other purpose than meeting debts and costs of liquidation. Assuming always that proper means The Memorandum of Association. Issue of shares at a discount. are employed for accomplishing that object, it is, in my opinion, perfectly Part I. lawful. It is true that no arrangement can be made which trenches Chap. 2. upon the rights conferred by statute upon creditors. But, in so far as concerns what may be described as the free assets of the company, meaning by that expression its surplus assets remaining after paying all debts and costs of liquidation, the sole interest is in the members, who are the units of the corporation. It has never, so far as I am aware, been disputed that a condition may be lawfully attached to the issue of preference shares to the effect that, in the event of there being at any time funds available for the declaration of a dividend, these shares shall carry a higher, or it may be a lower, dividend than the original shares. And in like manner it is, according to my apprehension, a lawful condition that, in the event of there being surplus assets when the company is wound up, such surplus shall be apportioned, according to any rule which may be agreed on, amongst the different classes of shareholders. The truth is that all those are domestic matters, in which neither creditors nor the outside public have any interest, and with which, in my opinion, it is the policy of the Legislature not to interfere. I desire to add that, in my judgment, when conditions for which due provision is made in the constitution of the company are sanctioned by its shareholders, and are inserted in the contract under which a preference shareholder accepts his shares, such conditions, if they be of the character which I have just indicated, will form an integral part of the contract, and be enforceable by the shareholder either against the company or its liquidator.” Issue of Shares at a Premium. Although the issue of shares at a discount is ultra vires as Issue of shares being a reduction of capital, the issue of shares at a premium at a premium. is not an increase of capital. Any premium paid to a company on an issue of shares is merely an accretion to capital, and may, subject to the provisions of the Memorandum and Articles, be divided among members; see Hilder v. Dexter. 1902, A.C. 474, at p. 480; Lubbock v. The British Bank &c., 1892, 2 Ch. 198. In Driffield Gas Light Co., 1898, 1 Ch. 451, 457, a contention that persons who took shares from the company at a premium should be allowed to share in the surplus assets in proportion to what they had paid for their shares was held untenable. Bonus Shares. It follows from the decision of Welton v. Saffery that bonus Bonus shares. shares cannot be issued to members, but when a company has assets representing either accretions to capital or accumulated profits which may be divided among members, it may increase its capital, issue new shares, and by arrangement with members apply such assets in payment partly or wholly of such new shares; see Bouch v. Sproule, 12 A.C. 385. Part I. Alterations of the Memorandum The Memorandum of Association. Alterations of the Memorandum. Excepting in the following cases, no alteration can be made by any company in the conditions contained in its Memorandum of Association (see Sec. 20 (2) of 1903): 1. If authorised so to do by its regulations a company limited by shares may— 1. By special resolution, divide its capital or any part thereof by subdivision of its existing shares or any of them into shares of smaller amount than is fixed by its Memorandum of Association (see Sec. 38 of 1903), thus increasing the number of its shares. 2. By special resolution, consolidate and divide its capital or any part thereof into shares of larger amount than its existing shares (Sec. 38 of 1903), thereby reducing the number of shares. 3. By special resolution, convert its paid-up shares into stock (Sec. 38 of 1903). 4. By special resolution, re-convert such stock into paid-up shares of any denomination (Sec. 38 of 1903). 5. Increase its capital by the issue of new shares of such amount as it thinks expedient (Sec. 42 of 1903). 6. By special resolution, reduce its capital, including paidup capital (such resolution to come into operation when an order of the Court giving effect thereto has been registered). The power to reduce capital includes a power (1) To cancel any lost capital or any capital unrepresented by available assets; (2) To pay off any capital which may be in excess of the wants of the company; see Secs. 44 to 55 of 1903. But the Court may sanction any form of reduction: The British and American &c. Corporation v. Couper, 1894, A.C. 399. 7. Reduce its capital by cancelling any shares which have not been taken or agreed to be taken by any person (Sec. 56 of 1903). 8. By special resolution, render unlimited the liability of its directors or managers or of the managing director (Sec. 84 of 1903). 2. Any company may also, with the sanction of a special resolution, and the approval of the Supreme Court, change its name (Sec. 160 of 1903). |