Зображення сторінки
PDF
ePub

amount at which such property was previously valued. If on the working of a year a loss is shown which cannot be met out of any reserve fund, that loss must be carried forward on profit and loss account, but no dividends can be paid until such debit balance has disappeared from the books.

Some difficulty arises as to the question, what constitutes depreciation? Is it the natural wear and tear and the gradual disappearance of the object only, or is it also the diminution in market or selling value produced by other causes? In this respect the distinction between fixed and circulating capital offers some guidance.

As regards property, such as buildings and machinery, bought or constructed for the purpose of being retained and used for the permanent purposes of the company, the selling value is not really of importance; the durability or usefulness of any such property is not affected by the conditions which affect the price, at which it can be sold, and the company is not any poorer because it is unable to sell such property at cost price; as regards property bought or manufactured for the purpose of being sold or resold, it is of course necessary to consider the market price, which is the only test of its value. The two classes of property just mentioned do not as a rule exhaust the whole of a company's pro perty; book-debts, which do not belong to either class, are frequently an important item. It is generally recognised in this country that a reduction ought to be made with reference to bad and doubtful debts, but great laxity prevails with reference to debts payable in a foreign paper currency or in a currency based on silver; it is customary for book-keeping purposes to convert these debts into sterling currency at a fixed rate of exchange, and this fixed rate is sometimes called the "par value "-as if there could be a par value between a metallic currency and a paper currency, or between a gold currency and a silver currency. There is then in such cases a tendency to disregard all fluctuations and to retain the old rate of conversion, although it differs materially from the actual rate. In cases where such debts are only of occasional occurrence this is not so important, but in the case of companies whose principal outstandings remain permanently in foreign countries, the consequences may be very serious; an English company having outstandings of a permanent nature in Brazil and converting them into sterling money at the old rate of 24d., whilst the present rate is about 8d., is doing exactly the same thing as if they valued their outstanding debts at their full value, notwithstanding the fact that

two-thirds of the same were known to be absolutely irrecoverable; yet English law seems to allow this system of book-keeping, and the payment of dividends cannot be prevented, although the company's capital is dwindling away by the depreciation of the currency in which it is invested.

As regards stock exchange securities bought for permanent investment, it may be somewhat inconsistent to prescribe deductions in respect of loss of market value, but such deductions are prudent, especially in cases where the fall in the market price is due to causes materially affecting their intrinsic value. When e.g. a stock exchange security has ceased to pay dividends, it ceases to serve the purpose of investment.

The German law proceeds on the principles for which I have contended in the foregoing observations. Section 261 enacts that (subject to the modifications to which I shall have to refer) the provisions contained in the mercantile code as to the balance sheets of traders generally are to be observed; according to these provisions all assets and liabilities must be taken at the value, which they had on the date, as from which the balance sheet is made out; debts must be taken at their probable value and irrecoverable debts be written off entirely. The modifications in the case of the balance sheets of companies are the following:

(1) Stock exchange securities and goods having a stock exchange or market value must be taken at such stock exchange or market price, if such stock exchange or market price is below the cost price; in any other case they are to be taken at cost price.

(2) Other assets are to be taken at a price not exceeding the cost price.

(3) Buildings and plant and other property not intended to be sold or resold, and being used for the permanent purposes of the company's business, may, notwithstanding the fact that their actual value is smaller, be taken at cost price, provided a sufficient amount is written off or placed to a depreciation account, by which the loss by waste. or wear and tear is provided for.

(4) Promotion or administration expenses may not be included among the assets.

(5) The amount of the capital and of all reserve and depreciation funds must be included among the liabilities.

(6) The profit or loss resulting from a comparison of the assets with the liabilities must be stated separately at the end of the balance sheet.

It will be noticed from these rules that no asset may be valued above cost price, even in a case where the actual value is above cost price; this provision does not appear very logical at first sight, and it may be urged that it is just as wrong to under-value the assets as to over-value them; as regards the latter observation it is obvious that the only persons damaged by an under-valuation are particular classes of shareholders or directors or managers, whose remunerations vary with the profits, whilst an over-valuation, as I have shown above, causes an injury, not only to the solidity of the company and to the interests of its creditors, but also to its competitors and the public generally, through the encouragement which it gives to unsound trading. There is therefore much more inducement to provide against over-valuation and to disregard the risk of under-valuation which, considering the many temptations in favour of high dividends, operating on the directors and managers of a company, is really not very serious. The illogical nature of the provisions in question cannot be entirely denied, but it was thought prudent that a company should not pay dividends out of unrealised profits, having also regard to the fact that the stock exchange price or market price is not always quite genuine, and may easily be sent up by fictitious transactions for the very purpose of enabling a company to value securities or goods at a price producing a profit available for the company's dividends.

One of the consequences of the rule, that no asset can be taken above cost price, is that assets which were acquired gratuitously cannot be valued at anything. Some writers have asked, why a company who had received any property by way of gift should not be able to include their value among its assets; but it is hardly worth while to consider this point, as generous benefactors, who give away their savings to trading companies, are freaks of nature which need not trouble the legislator's mind.

A company which acquires the goodwill of a business for valuable consideration, may value such goodwill for its balance sheet at cost price, subject to the proper deduction for depreciation, but it cannot value its own goodwill if nothing was paid for it. (See Ring, pp. 46, 602, 613.)

The German code does not lay down any rule as to the manner in which depreciation by wear and tear and waste ought to be calculated. In some cases the natural depreciation is obvious, as in the cases of leases or patents expiring after a certain number of years. The rate of depreciation in the case of

buildings, machinery, etc., can also be easily ascertained with the advice of experts; in other cases, common sense and prudence will usually find a way out of the difficulty. As regards goodwill, depending on personal efforts and qualities, a somewhat rapid rate of depreciation ought to be allowed for; where goodwill is attached to particular premises, as in the case of inns and hotels, its value is not generally taken as a separate item, but included in the value of the premises. For these reasons the item of goodwill is not frequently seen in the balance sheets of German companies.

Another rule of law, which tends to the preservation of the capital of German companies, is contained in section 262, which provides that a reserve is to be formed in the following way : (1) at least one-twentieth part of the net profit of each year is to be credited to this fund, until it shall have reached the tenth part of the company's capital, or such larger part of such capital, as shall be provided in the articles; (2) in addition to this, any net premium realised by the issue of any part of the company's capital must be placed to the reserve fund, as well as (3) any amounts paid by shareholders in consideration of any preferential rights accorded to their shares (unless such payments are used for the purpose of making good any special losses).

The statutory reserve fund cannot be used for the payment of dividends in bad years, but separate reserve funds may be formed for that purpose. (Esser, p. 164, Ring, p. 631.)

The provisions which I have hitherto discussed are intended to prevent the following mischiefs :—

(1) The watering of the original capital.

(2) The dwindling away of the company's assets by the omission of any allowance for their depreciation in the balance sheets.

They cannot, of course, prevent the gradual disappearance of the company's capital by losses in business in cases in which profits cease altogether, but there are provisions which prevent a company from carrying on business after a considerable part of its assets have been lost.

It is provided by section 240:

(1) That if, on the drawing up of any yearly or intermediate balance sheet, it appears that one half of the company's capital has been lost, the managing board must immediately convene a general meeting, to whom the state of facts has to be submitted.

(2) That in the case of the insolvency of the company, and

also in the case of any yearly or intermediate balance sheet, disclosing the fact, that the liabilities of the company exceed its assets, it is the duty of the managing board to initiate bankruptcy proceedings without delay. A disregard of this provision is punishable with three months' imprisonment and a fine (section 315-2).

There are no similar rules in English law; in the case of insolvency, winding-up proceedings are of course taken as a general rule, but the mere fact that the assets are insufficient to pay its debts, does not prevent a company from continuing business. As long as a company can pay its way by the use of credit or otherwise, so long it can continue to trade in this country; in some lucky cases, this may enable it to retrieve its losses and to start a more prosperous career, but in the larger number of instances, a company, having reached such a low condition, has to procure accommodation on terms so onerous that the chances of profitable trading are very much reduced. The German rule is therefore preferable in the interest of creditors and of the general public.

The German law on stock exchange transactions passed in 1896, has no such wide purposes as the above quoted sections of the mercantile code relating to companies; its only object was to hinder certain kinds of stock exchange speculations; in so far as it deals with shares in companies, it refers not merely to shares in German companies, but to shares generally, nor does it refer to all dealings in such shares, but only to dealings on any authorised stock exchange. In England the stock exchanges can at their discretion make rules as to the conditions, under which a settlement or quotation is granted to any shares or debentures or other securities, and this was also the case in Germany prior to 1896, but since the statute of that date, the stock exchange rules are partly fixed by law. The provisions in question have therefore no direct connection with company law, but as they have to be considered on the formation of a company, whose shares are to be dealt in on the stock exchanges, and also on any increase of its capital, some reference must be made to them.

The rules in question prescribe :

(1) The compulsory issue of a prospectus, the authors of which are under a specially stringent liability;

(2) The lapse of a space of time between the incorporation. of the company and the public issue of its shares ;

« НазадПродовжити »