1. Sources of Long Term Finance
Nihal Matara Arachchige

2. Capital
“The money or other assets with which a company starts a business”
(The Oxford Dictionary)

3. St.Michael Uranium Mines Ltd V Rayrock Mines Ltd
….It is right to say that there is confusion commonly existing regarding the meaning of the term capital in corporation financing.to the economist it usually signifies tangible instruments of production ,that is physical assets used in the creation of other goods or services. the average man frequently thinks of money as capital and uses the term as synonymously, and bankers often use the word capital in the sense of net worth. However ,in business parlance the term ordinarily means the investment in an enterprise, which, from the legal point of view may be thought of as being represented by money or money’s worth consisting of property and valuable tangible assets the corpus of corporate business…….

4. CAPITAL
Capital is the wealth owned or invested by a person or an organization.
Capital can be consist of;
Share capital(the funds subscribed by its share holders) and
Loan capital(funds provided by investors holding debentures and debenture stocks)

5. Types of Capital Equity Shares Preference Shares Cumulative or
Non-cumulative
Redeemable or
Perpetual
Convertible or
Non Convertible

6. Debentures Debentures – Sec 81-85 Redeemable or Irredeemable
Non Convertible or
Fully Convertible or
Partly Convertible

7. SHARES Companies share capital is divided into shares.
Sec 49(1)- A share shall be movable property
Sec 49(5)- A share is transferable in the manner provided in the Articles
Sec 49 (3) - A company can issue different classes of shares which -
are redeemable;
confer preferential rights to distributions; or
confer special, limited or conditional voting rights or confer no voting rights.
Sec 49 (2) - Subject to the company's articles, a share in a company confer certain rights on the holder
Sec 49(4)- No share shall have a nominal or par value.

8. Share-true perspective
A share signifies the following,
The interest of a share holder in the company- the right to receive dividend, the right to attend meetings and vote on a poll, share in the surplus assets of the co. on liquidation etc….. )
These are the rights provided to a SH in sec 49.
The liability of a share holder……
Right to transfer the shares subject to A.O.A
Binding covenants on the part of the company as well as the share holder

9. ISSUE of SHARES Initial shares issue- Sec 50
Immediately after the incorporation of a company
Immediately following the issue of a certificate of amalgamation under section 244
Sec 51- the board of a company can issue shares to persons as it considers appropriate.
Notice to the Registrar regarding issue of shares

10. When issuing shares…
If the shares issued confer rights other than specifically stated in Sec 49 or impose any obligation on the holder then the Board should approve the “terms of issue”
Terms of issue
Deem to form part of the Articles and can be amended according to Sec 15
should be consistent with the Articles of the co./If inconsistent are invalid and of no effect

11. Consideration for issue of shares
Sec 52(1) Before issuing shares, the board should
decide the consideration for which the shares will be issued
The consideration can take any form
After receiving the consideration, the company should allot shares within 20 days

12. Pre-emptive rights to new issues.
Sec 53 Subject to the company's articles,
where a company issues shares which rank equally with or above existing shares in relation to voting or distribution rights, those shares shall be offered to the holders of existing shares in a manner which would, if the offer was accepted, maintain the relative voting and distribution rights of those shareholders
Such offer shall remain open for acceptance for a reasonable period of time.

13. A share is issued …. Certificate of shares
According to Sec 54 a share is deemed to be issued when the name of the holder is entered on the share register
Certificate of shares
Sec 79.- A certificate signed under the name of the company by a director and secretary of the company specifying any shares held by any shareholder, should be prima facie evidence of the title of the shareholder to the shares.

14. Bonus Issue Position under the 2007 Act
Sec 55 of the Securities Exchange Commission Act, No. 36 of 1987 as amended provides an interpretation of bonus issue.
“Bonus issue means the offer of any security or of securities to be issued in the future of a listed public company to existing security holders of such company, howsoever such offer is described or referred to, without consideration and in proportion to the securities held by them in such on the date of such offer”.
Position under the 2007 Act
Is Bonus Issue possible under the Companies Act of 2007?
Sec 72(3)(b) of the Act facilitates issue of bonus shares where it is mentioned that “an allotment of fully paid shares in the company may be validly made by way of capitalization of reserves of the company”.
Further, the Registrar of Companies in his notice dated has clearly mentioned that bonus shares can be issued under 2007 Act.

15. Capital Maintenance

16. Share Capital : Different meanings
Authorised Share Capital
Issued Share Capital
Stated Capital
Position under 2007 Act is different.
Position under the 1982 Act

17. Stated Capital (Sec.58)
Stated capital means the total of all amounts received by the company or due and payable to the company
-In respect of the issue of shares and
-In respect of calls on shares – Sec 55

18. Stated Capital Account
Generally, a company that follows a good accounting practice maintains a separate ‘stated capital account’ for each class of share the company issues, together with the total consideration received.

19. “Authorized capital”
“The board of the company may issue such shares to such persons as to considers appropriate”(sec51)

20. Shares issued for a non-cash consideration(sec.58)
Where shares are issued for a consideration other than cash, the board must determine the cash value of the share. Where a share has attached to it an obligation other than an obligation to pay calls ,and that obligation is performed by the shareholder ,then
(a) the board must determine the cash value, if any, of that performance
(b)the cash value of that performance will be deemed to be a call which has been paid on the share for the purposes calculating the stated capital .

21. Reduction of stated capital
A co. can reduce its stated capital by a special resolution
60 days before passing resolution public notice should be given.
If stated capital is reduced in breach of an agreement entered into by a company and a creditor such reduction will be invalid and of no effect.
A Co. should give notice to the registrar within 10 working days of such reduction.

22. The stated capital will not automatically reduce in the event of;
A share redemptionat the option of the shareholder under sec68
A share redemption on a fixed date under sec69
Buy back of shares under sec 95

23. Financial assistance in connection with purchase of shares Sec 70
As a general rule a company should not give financial assistance directly or indirectly for the purpose of the acquisition of its own shares
However, There are some exception to this rule

24. Repurchase of shares
Sec 63- A company can re-purchase or acquire its own shares in the following instances–
If the articles of the company provide for it (Sec 64)
(However before purchasing the shares the board of the co. must resolve certain matters)
If the co. is a pvt co. with the agrrement of all the shareholders
In accordance with an order made by court.

25. Redemption of Shares Sec 66-69
SEC 66. A share is redeemable if the articles of the company make provision for the redemption of that share by the company – (a) at the option of the company; - Sec 67 (b) at the option of the holder of the share; - Sec 68 (c) on a date specified in the articles, - Sec 69 for a consideration that is specified or to be calculated by reference to a formula or required to be fixed by a suitably qualified person who is not associated with or interested in the company.

26. Redeemed v Re-purchased
In a redemption a company purchases its own shares in accordance with the terms on which those shares were issued where as in a re-purchase a company can buy-back its shares only if its article provide for it.
Redemption can also be considered in effect a loan given to a company,(just like a financial liability)
The terms of redemption are set out in the articles.

27. Solvency Test

28. SOLVENCY TEST Sec 57
(1) A company shall be deemed to have satisfied the solvency test, if-
(a)it is able to pay its debts as they become due in the normal course of business; and
(i,e.,the equity or liquidity test)
(b)the value of the company's assets is greater than
the value of its liabilities; and
the company's stated capital.
(the balance sheet test)

29. 2) In determining whether a company satisfies the solvency test, the board-
shall take into account the most recent financial statements of the company
shall take into account circumstances the directors know or ought to know which affect the value of the company's assets and liabilities ;
may take into account a fair valuation or other method of assessing the value of assets and liabilities.

30. Reference to Solvency Test
Sec 31 – distribution by a pvt co. Sec 56 – distribution to SH Sec 61 - distribution to SH when the co. does not satisfy the solvency test Sec 65 – contract to repurchase shares Sec 70 – financial assistance to purchase co’s own shares Sec 98- required to purchase shares under S 94

31. Distribution

32. DISTRIBUTIONS distribution" means-
the direct or indirect transfer of money or property, other than the shares of a company, to or for the benefit of a shareholder ; or
the incurring of a debt to or for the benefit of a shareholder,
in relation to a share or shares held by that shareholder, whether by means of a payment of a dividend, a redemption or other acquisition of the share or shares, a distribution of indebtedness or otherwise.

33. Before making a distribution
The board should authorise it
The shareholders should approve by an ordinary resolution unless the company's articles provide otherwise
The board of a company may authorise a distribution where it is satisfied that the company will, immediately after the distribution is made satisfy the solvency test.
The directors who vote in favour of a distribution should sign a certificate setting that in their opinion, the company will satisfy the solvency test immediately after the distribution is made, provided the board obtains a certificate of solvency from the auditors.

34. Recovery of Distributions Sec 61
If immediately after a distribution, the co. did not satisfy the solvency test it can be recovered from the shareholder,
unless-
the shareholder received the distribution in good faith and without knowledge of the company's failure to satisfy the solvency test;
the shareholder has altered his position in relying on the validity of the distribution; and
it would be unreasonable in view of the circumstances to require repayment in full at all.

35. Payment of Dividends Sec 60
A dividend is a distribution out of profits of the company, (other than an acquisition by the company of its own shares or a redemption of shares by the company)
There are certain guidelines that must be followed.

36. PROSPECTUS

37. Prospectus
Public co. raise their initial capital through a process of invitation, application and allotment
Invitation – invitation is made to the public to purchase shares. This is done through a doc called prospectus. Prospectus will set out the advantaged that will arise from investing in the co.
Prospectus is an invitation to treat
Application- An interested person apply for shares/ make the offer
Allotment- If the co. accepts the application shares will be allotted and the name will be enetered in the register of SHs.

38. Calls on shares
55.(1) Where a call is made on a share or any other obligation attached to a share and is performed by the shareholder, the company shall within ten working days give notice to the Registrar in the prescribed form of-
(a) the amount of the call or its value as determined by the board under subsection (3) of section 58; and
(b) the amount of the stated capital of the company following the making of the call.

39. Allotment of shares
Upon receipt of the consideration, the company should within a period of 21 days, make an allotment of shares.
According to Section 51, the Board of a company can issue shares subject to the provisions of Sec 52 (consideration for issue of shares) and sec 53 ( pre-emptive rights to new issue) and the company’s Articles.

40. Definition of Prospectus
Sec 529- prospectus means, “any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription to or purchase of any shares or debentures of a company” Further, even if such a prospectus, notice, circular, advertisement, or other invitation expressly provide it is not a prospectus still it is a prospectus.

41. Contents of a Prospectus Sec 37
Every prospectus issued by or on behalf of a company -
should contain the information specified in Part I of the Fourth Schedule and
Should set out the reports specified in Part II of the
Fourth Schedule
It is unlawful to issue any application for shares or debentures of a company without a prospectus, which does not comply with provisions of Sec 37

42. There is a list of 19 items
Business which the promoters intend to carry out during 5 years from the date of commencement of business by the company.
The no. of founders or management
The names, descriptions and addresses of directors
Minimum subscription (minimum amount to be raised to issue shares)
Time of the opening and closing of the subscription list
The amount payable at the application and allotment of each share
The no of shares or debentures issued or to be issued within the first 2 years for consideration other than cash
The amount or estimated amount of preliminary expenses
Any amount or benefit paid to any promoter and the consideration for the payment
The names and addresses of auditors
Full particulars of the nature and extent of the interest of every director in the promotion of the co. or in the property to be acquired by the co.
The rights and obligations attached to classes of shares
The reports – Auditor’s report
- accountant’s report

43. Requirements for prospectus
Dated according to Sec 36- Prospectus should bear a date and that date should be taken as the date of publication of the prospectus
Signed according to Sec 40- prospectus must be signed by every director or proposed director of the company, or by his agent authorised in writing
Registered according to Sec 40- A prospectus should be delivered to the Registrar for registration before its publication by a co.

44. untrue statements Remedies 1. statutory remedies
An untrue statement is a statement that is misleading in the form and context in which it is included (Sec 529)
Remedies
1. statutory remedies
2. common law remedies

45. Civil liability for untrue statements in prospectus- Sec 41
where a prospectus invites persons to subscribe for shares or debentures of a company, such prospectus contains any untrue statement, and loss or damage is sustained due to such untrue statement, the following persons should be liable to pay compensation -
(a) directors of the company at the time of the issue of the prospectus
(b) every person who has authorized himself to be named and is named in the prospectus as a director or as having agreed to become a director, either immediately or after an interval of time ;
(c) every promoter of the company ; and
(d) every person who has authorised the issue of the prospectus
These persons can escape liability If-
(a) having consented to become a director of the company he withdrew his consent before the issue of the prospectus and that it was issued without his authority or consent ;
(b) the prospectus was issued without his knowledge or consent and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent ;
(c) after the issue of the prospectus and before allotment thereunder, he on becoming aware of any untrue statement in such prospectus, withdrew his consent thereto and gave reasonable public notice of the withdrawal and of the reasons therefor ;
(d) he had reasonable ground to believe and did up to the time of the allotment of the shares or debentures, as the case may be, believed that the statement was true ;

46. Expert’s Statement Sec 38
As per Sec 38 the term "expert" includes an engineer, a valuer, an auditor, an accountant and any other person having similar professional qualifications
A prospectus including a statement purporting to be made by an expert, should not be issued, unless such expert has given consent and has not before delivery of a copy of the prospectus for registration, withdrawn his written consent
Further, according to Sec 41 where an Expert consents to the issue of a prospectus by reason of giving such consent he does not become liable as a person who has authorized the issue of the prospectus.
But, an Expert is liable where he has authorized the issue of a prospectus in respect of an untrue statement purporting to be made by him as an expert.
To avoid liability he must prove-
having given his consent he withdrew it in writing before delivery of a copy of the prospectus for registration
after delivery of a copy of the prospectus for registration and before allotment he on becoming aware of the untrue statement withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reason
he was competent to make the statement and that he had reasonable ground to believe and did up to the time of the allotment of the shares or debentures, as the case may be, believed that the statement was true.

47. Criminal liability for untrue statements in a prospectus – Sec 42
Where a prospectus issued includes any untrue statement, any person who authorised the issue of the prospectus shall be guilty of an offence and be liable on conviction to a fine not exceeding five hundred thousand rupees or to imprisonment for a term not exceeding two years or to both to such fine and imprisonment To avoid liability it must be proved- that the statement was immaterial that he had reasonable ground to believe and up to the time of the issue of the prospectus did believe, that the statement was true. An Expert should not be deemed to have authorised the issue of a prospectus by reason only of his having given the consent required by the provisions of section 38, to the inclusion in such prospectus of a statement purporting to be made by him as an expert. No prosecution shall be instituted under this Section except with the sanction of the Attorney-General.

48. Common Law remedies for untrue statements
Misrepresentation
The Royal Mail Case or R v Kylsant & Otrs (1931)
The director of the Royal Mail Steam Packet Co, Lord Kylsant, had falsified a trading prospectus with the aid of the company accountant to make it look as if the company was profitable and to entice potential investors. Following an independent audit instigated, Kylsant was arrested and charged with falsifying the prospectus. Kylsant was found guilty of falsifying the trading prospectus and sentenced to twelve months in prison.
Greenwood v. Leather Shod Co.
The prospectus of the co. stated that ‘orders’ received. In fact the co. received orders for trial sets for approval. Plaintiff subscribed and paid for shares on the faith of the prospectus.. Therefore, he claimed receission against the co. on the ground of misrepresentation.
Held: The prospectus is cunningly drawn to avoid as far as possible the truth. It is framed to convey a perfectly untrue statement.

49. Types of Share Issue- Raising Capital from the primary market
A firm can raise capital from the primary market by issuing the securities in the following ways;
Public issue
Private placement
Right issue
If the Articles of a co. require the sanction of the co. in general meeting, for a R issue, such sanction should first be obtained. If there is no such requirement, the company’s directors can revolve to make such an issue.

50. Common Law remedies for untrue statements
Misrepresentation
The Royal Mail Case or R v Kylsant & Otrs (1931)
Greenwood v. Leather Shod Co.

51. Companies dispute Board

52. Power of board to appoint administrator
where the board of a company considers that –
(a) the company is or is likely to become unable to pay its debts as they fall due; and
(b) the appointment of an administrator will be likely to achieve one or more of the purposes referred to in subsection (2). The board may resolve to appoint an administrator of a company.

53. (2) The purposes for which an administrator may be appointed are –
(a) the survival of the company and the whole or any part of its undertaking as a viable concern;
(b) The preparation and approval of a compromise under Part IX or a compromise or arrangement under Part X; or
(c) a more advantageous realization of he company’s assets than would be likely on a winding up.

54. (3) A resolution appointing an administrator shall specify the purpose or purposes for which the appointment is being made, and once passed may not be rescinded without the leave of the court.

55. Duty of administrator to summon initial meeting
404. (1) An administrator shall within ten working days of being appointed, send a written notice to all creditors of the company so far as he is aware of their addresses-
(a) advising them of the appointment of an administrator; and
(b) calling a meeting of creditors to consider whether the appointment should be confirmed.