Financial Times

The new Draft Companies Act, and the challenges ahead for directors was brought forth at a discussion organised by the Sri Lanka Institute of Directors (SLID) at the Trans Asia Hotel recently.

Discussions on Section 49 (4) of the new Draft Companies Act, which states that no share in a company should have a nominal or par value were led by a panel consisting K. Kanag- Isvaran, President’s Counsel, Deva Rodrigo, the Chairman of the Ceylon Chamber of Commerce and the Precedent Partner of Nithya Partners, Arittha Wikramanayake.

According to the new Companies Act, the shareholder divisions would be paid on the value of the shares being held and not on the number, since the number would be undetermined.

As Mr. Isvaran pointed out on a lighter note, “If Daddy has one million shares you cannot say that he has one million rupees. Those one million shares could be just five hundred rupees.”

“There’s no magic in it,” said Mr. Wikramanayake who, along with the other panellists emphasized that this was not New Zealand law. He explained a similar situation when Canada wanted to pass new company laws, they looked at Britain but because it was moving away from their traditional laws to those of the EU, Canada decided to formulate their own laws.

Countries like Australia, Hong Kong, Singapore, and New Zealand followed suit and added that this was a law being practiced in most parts of the world.

By law the value of a share changes from day to day and this value is determined by the directors or by the market, therefore, one may have a certain number of shares but the value would differ accordingly, from day to day. Deva Rodrigo gave an example of how, if the stated capital of a company is Rs.500 million and one has Rs.1 million invested in it, then the number of shares he has in the company depends on the current value of a share.

Another fact the panellists stressed upon was that, cases existed where company directors did not have a clear idea of their general duties.

They predicted a change in this aspect since the new Companies Act, codified a director’s common law duties, re-stated the general principles which govern the conduct of directors and explained the matters to which directors should have regard when acting in furtherance of their duties and obligations.

Deva Rodrigo covered areas such as the solvency test which states that the net worth of a company should be less than the stated capital, reduction of stated capital, dividends, serious loss of capitals and minority buy-out rights, which grant greater protection for minority shareholders by the introduction of minority buy-out rights at a fair price.

Examining the Draft Companies Act from the perspective of the Securities and Exchange Commission, Mr. Wikramanayake pointed out the importance of the amendments to fines. Current fines of just Rs. 250 would be as much as one million rupees with the new act.

He said that such a fine could not be considered too much as damages which caused the fine would be far greater.

One question that arose was, if a par value did not exist, how would it be traced, which portion of that evaluation came out of the stated capital, especially if it was a quoted company where the share was traded, and if multiple issues of shares existed at different values.

While there was no problem if it were only one issue, tracing multiple issues would lead to confusion since in that case, one would have to maintain the issue value against each serial number of the share, which is similar to going back to par value.