N3643

PAPUA NEW GUINEA
IN THE NATIONAL COURT OF JUSTICE

WS NO. 748 OF 2000

BETWEEN:

PUBLIC OFFICERS SUPERANNUATION BOARD
Plaintiff

AND:

HENGANOFI DEVELOPMENT CORPORATION
Defendant

Waigani: Manuhu, J
2007: 5 November
2009: 30 April

JUDGMENT

CONTRACT – Preference Share Agreement – Defendant sought financial assistance to build a commercial building – Plaintiff obtained shares to be redeemed after 10 years – Upon redemption Plaintiff demands further payment pursuant to agreement – Defendant demands reimbursement of overpayment pursuant to agreement – Interpretation of Clause on cumulative preference share.

COMPANY LAW – Shares Preference Share Agreement – Dividends – Cumulative Preference Share – Non-cumulative Preference Share – Definition and distinction.
 
No case cited.

Counsel
Mr. T. Anis, for the Plaintiff.
Mr. K. Frank, for the Defendant.

30 April, 2009

1.	MANUHU, J: This is a claim for a sum of K1,153,164.38 in dividends against the Defendant under an agreement called the Preferential Share Agreement. The Defendant says that it has overpaid the Plaintiff and files a cross-claim for the same.

2.	Pursuant to the Statement of Agreed and Disputed Facts and Legal Issues, in or about 1989, the Defendant proposed to construct a commercial building in the town of Goroka, Eastern Highland Province. The Defendant approached the Plaintiff for assistance. The Defendant agreed to assist in the funding of the construction by subscribing for redeemable preference shares in the Defendant.

3.	On or about 6 June 1989, the parties entered into a Preference Share Agreement which was duly executed. The main terms of the agreement were that:

(a)	The Defendant was required to issue and the Plaintiff was required to purchase K1 million worth of preference shares at K1.00 per share.

(b)	The Plaintiff was to hold the preference shares for 10 years and that at the end of the tenth year, the shares would be redeemed by the defendant.

(c)	The money would be spent to construct a commercial building for leasing.

4.	On 30 July, 1999, the Defendant redeemed the preferential shares and paid K1,100,000.00 to the Plaintiff. The K100,000.00 was the dividend declared for distribution in 1999 which was paid to the Plaintiff. The Defendant's financial statements for the relevant 10 years show that the Defendant did not declare dividend for distribution except in the year 1999.

5.	The main issue relates to calculation of the preference dividend as per Clause 3.2(a) of the Agreement. The clause provides:

"3.1	Subject to the terms of this Agreement the Board hereby agrees to subscribe for and the company hereby agrees to allot one million (1,000,000) redeemable preference shares of one kina (K1.00) each in the capital of the company to the Board in accordance with this clause.

3.2 	The shares shall be issued as fully paid and shall entitle the holder thereof:

(a)	 to a fixed cumulative preferential dividend net of withholding tax of 13% per annum payable six monthly in arrears."

6.	The Plaintiff says that Clause 3 means that the dividend is cumulative at 13 per cent per annum of the capital investment or share contributed by the Plaintiff. The Defendant says that Clause 3 means that the dividend is to be calculated at 13 per cent on declared dividend in any given year. Consequently, since no dividend was declared for the remaining 9 years, the Plaintiff is not entitled to dividends for those years. Which interpretation of Clause 3 is correct?

7.	Of course, a person holding shares in a company expects, among other things, dividends to be paid to him but he does not receive such dividends unless the company makes a profit. Purchase of shares in a company is an investment which involves risks. The company is expected to make a profit but it could make a loss initially or periodically. In the event of loss, no dividend is declared and no payment of dividend is possible.

8.	Purvis on Propriety Companies, Butterworths, Sydney (1973) says at page 190 paragraph 116 that:

"The articles of association of a company usually provide that no dividend is to be paid otherwise than out of profits or bear interest against the company.

'If expenses or payments are obviously charged to capital and are so charged simply to swell the apparent profits and to make it appear that dividends may properly be declared, dividends declared and paid under such circumstances cannot be treated as legitimately paid out of profits, and can no more be justified than if they were paid out of capital.

No dividend is payable to the shareholders of any company except out of profits.'"

9.	It is not disputed that the Defendant, out of 10 years, made profit and declared dividend in just one year. The other nine years were years of loss. Accordingly, as argued by the Defendant, the Plaintiff could only receive dividend paid out of the profit from that one year only. 

10.	However, it is presumed that preference share or preference dividend is cumulative and shall be paid regardless of loss. As noted by Kimuli, Amankwah and Mugambwa (Introduction to the Law of Business Associations in Papua New Guinea, Pacific Law Press 1989, at p.84):

"As dividends are only paid out of profits, it is possible that the preferential dividend may not be paid in a given year. The articles may provide that if the company does not pay the preferential dividend for the year, arrears shall be made up in subsequent years when profits are available, hence the name cumulative preference shares. Preference shares are presumed to be cumulative."

11.	Halsbury's Laws of England, 3rd ed., Vol.6, Butterworth & Co. (Publishers) Ltd, 1954, page 140, paragraph 292, makes it clearer, as follows: 

"If preference shares confer a preferential right in respect of dividend, the dividend is prima facie cumulative – that is to say if the money is applicable to dividend in one year are not sufficient to pay the preference dividend, the deficiency, including arrears must be make good out of moneys so applicable in future years, before anything is paid as dividend to the holder of other shares ranking after such preference shares."

12.	The difference, therefore, between cumulative and non-cumulative preference shares is well explained by Purvis (above) at page 67 as follows: 

"Non-cumulative preference shares confer upon the holder a right to receive an annual dividend of a fixed percentage out of the net profits of each year available for distribution before any dividend is paid to any other shareholder holding shares of a class over which the non-cumulative shares have priority. The dividend is dependent upon there being a net profit for the year available for distribution. In the event of the profit available for distribution being insufficient to meet the preference dividend, future profits cannot be resorted to to make up the deficiency as in the case of cumulative preference shares." 

13.	In this case, the parties entered into a share preference agreement. It must, therefore, be presumed that the Plaintiff is entitled to cumulative share preference which accumulates in the event of loss. However, Clause 3 specifically describes the dividend as "cumulative preferential dividend". Any doubt is thus decisively removed by the use of the term 'cumulative' in Clause 3. This is succinctly explained in Stroud's Judicial Dictionary, 5th ed., John S. James, Vol. 1 Sweet & Maxwell Limited, 1986, as follows:

"A preference dividend is, prima facie, cumulative; so that failure of profits wherewith to pay it in any one year will be made good out of any profits that may be made in a subsequent year…; and if 'cumulative preference dividend' is prescribed, doubt hereon is removed…". 

14.	Encyclopedia Brittanica (1911) (http://www.encyclopedia.com), in defining 'dividend', states: 

"The dividend on preference shares is either 'cumulative' or contingent on the profits of each separate year or half year. When cumulative, if the profits of any one year are insufficient to pay in full, the deficiency has to be made good out of subsequent profits." 

15. I am indebted to all the above texts and references which clearly distinguish cumulative and non-cumulative preference shares. The distinction also separates the Plaintiff from the Defendant in relation to their interpretation of Clause 3. The Defendant's interpretation is wrong. The Plaintiff's interpretation of Clause 3 is correct. As a cumulative preferential share, the Plaintiff is given preference over other shareholders at a fixed rate, and; such dividends are cumulative in relation to each of the 10 years. The Plaintiff is entitled to resort to profits in future years to make up deficiencies in all the years of loss. 

16.	Naturally, for computation of dividends payable at the agreed rate, the cut off date is the date the shares were redeemed being 30th July 1999. As at 28th July 1999, the sum of K2,153,164.38, computed at the rate of 13 per cent, was due to the Plaintiff. The said rate could not be sustained after 30th July 1999 when the shares were redeemed. There would be no contractual basis to retain the prescribed rate after the redemption. 

17.	The Defendant had made payments totaling K1,100,000.00 to the Plaintiff. This payment also defuses the cross-claim. The Defendant still owes the Plaintiff the sum of K1,053,164.38. 

18.	I find ultimately for the Plaintiff in the sum of K1,053,164.38 with 8 per cent interest from the date the proceeding was commenced. The Plaintiff is also awarded cost which if not agreed shall be taxed. 
 
Orders accordingly
____________________________________
Blake Dawson Waldron: Lawyers for the Plaintiff
Young & Williams: Lawyers for the Defendant