Sino Grandness

[specuvestor]

Disallowing dividend payment when there is accumulated loss will discourage acquisition. Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around. Why should he be penalised for the ineptness of the previous owner?

You have suggested a good case study on the conflict, but we shouldn't deny that companies have spent resources to eliminate the accumulated losses, just to ensure future dividend payout, as stated in their formal doc. One good case, is the recent Global Testing corp action on capital reduction.

Chances, are there are unknowns to us, which cause the confusion. It might also a grey, even to the professionals.

(not vested)

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Capital reduction is a peripheral issue here. 

My understanding is that the capital reduction enables companies to pay cash, in excess of profit, to shareholders.

Petra Foods is going to return US$ 60m to shareholders from the sale of its chocolate ingredient business. As the sale resulted in a pre-tax profit of US$ 46.1m (after-tax profit will be lower), a capital reduction exercise is needed.

Conservative depreciation policy has resulted in Global Testing reporting losses for many years. But the company has cash in excess of requirements, and it is returning the excess to shareholders by way of capital reduction.

I have posted elsewhere before (too lazy to search) on a discussion on Capital Reduction that it can be due to excess capital or to wipe out losses. There may not be cash payments to shareholders. In GTC case there is excess capital even after eliminating the losses. It is a term used when there is a transfer between the accounting line of "Share Capital" and "retained earnings / accumulated loss". This is not uncommon. Neither is Qian Hu's case uncommon... it's a non-starter

To me what is uncommon is paying dividend without profit. I am not a corporate lawyer and I am basing on my experience with various corporations in the past, s-chip or otherwise, from what was told to me. Nonetheless to me New Toyo is a good case study to study this uncommon phenomenon. When I am free I will probably email SGX to ask on the basis

[portuser]

Specuvestor wrote:

'To me what is uncommon is paying dividend without profit. I am not a corporate lawyer and I am basing on my experience with various corporations in the past, s-chip or otherwise, from what was told to me. Nonetheless to me New Toyo is a good case study to study this uncommon phenomenon. When I am free I will probably email SGX to ask on the basis'



Did you mean 'accumulated profit' instead of 'profit', as you have stated in #1683 that "I'm still perplexed how they can pay dividend with accumulated loss"?

If you meant 'profit', then your query to SGX on New Toyo International Holdings Limited (NTIH) will draw a blank. 

NTIH has reported profits, and paid dividends, for 16 consecutive years, based on my recollections. The earliest available records on the SGX website pertaining to 2009 show that in that year, NTIH reported a profit of $9.51m, paid $4.01m in dividends. It started the year with accumulated loss of $27.14m and ended with a smaller accumulated loss of $21.64m.

As you are concerned about the propriety of Sino Grandness Food Industry Group Limited paying dividend for 2015 when
(1)it had accumulated loss, and 
(2)there was no profit in 2015; 

do you not want to take the opportunity to seek clarification from SGX? 

[specuvestor]

Yes of course i will be asking about both New Toyo and Sino Grand to understand better where is the technicality specifically to S403, maybe ACRA as well as SGX. Hope ill get an answer that will be enlightening as I am naturally inquisitive

http://www.fool.com/knowledge-center/201...arnin.aspx
Basics...

http://www.singaporelaw.sg/sglaw/laws-of...chapter-16
16.6.6 on dividends and 16.6.8 on capital reduction

http://www.financierworldwide.com/return...znubNoaySM
"In terms of current year profits, a company is not required to apply its current year profits to offset any accumulated losses from past years and may distribute such profits as dividends."

http://www.sid.org.sg/web_publications/a..._detail/58
"There is still some uncertainty surrounding the precise legal definition of “profits” for the purpose of this rule. This is notwithstanding that the Company Legislation and Regulatory Framework Committee had recommended that dividend distributions should only be permitted where the company has accumulated realised gains in accordance with prescribed accounting standards. Whatever the case, it is extremely unlikely for a court to be persuaded that an insolvent company would have distributable profits. On the contrary, the court in Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and Others held that directors who allow the payment of dividends where there is no available profits are in breach of both their fiduciary duties to the company and section 403 of the Companies Act, neither of which are dependent on the solvency of the company. It is thus pertinent for directors to obtain proper confirmation from their auditors that the company does have distributable profits prior to paying out any dividends. Clearly, a conservative approach towards the definition of “profits” for this purpose would be prudent"

[portuser]

Specuvestor

I know of two reviews of the Companies Act initiated by the Ministry of Finance (MOF).

The first review was conducted by the Company Legislation and Regulatory Framework Committee (CLRFC), set up in 1999. 
 
The Steering Committee for review of the Companies Act (SC) was set up in 2007 for the second review. 

The CLRFC did not cover section 403 of the Companies Act. 

SC's report dated June 2011 dealt with section 403 in page 3-27 and 3-28 (reproduced at the end of this post).

In short, SC recommended the retention of section 403 in its present form. It said " The question is whether or not prior accumulated losses should be cleared before payment of dividends is allowed. There are reasons why this should not be required, viz, current shareholders should not be burdened with disadvantages arising from accumulated losses." 

Will this help you to clear the concern your expressed in # 1683 (" I'm still perplexed how they can pay dividend with accumulated loss.")?

I read the SC's report in 2011. The point about the need to allow dividend payment out of profit despite accumulated loss must have stayed with me. And that led me to write in #1695 "Disallowing dividend payment when there is accumulated loss will discourage acquisition. Buyer will have less incentive to take over a company that has raked up huge past losses if he cannot receive a dividend after turning the business around. Why should he be penalised for the ineptness of the previous owner?".

MOF accepted SC's recommendation not to amend section 403 (reproduced at the end of this post).

You indicated in #1693 that "the mechanics of the definition of "profit" might have changed." I think unlikely.

......................................................................................................................................................................

Page 3-27 and 3-28 of SC's report:

www.law.nccu.edu.tw/files/news/1131_342904d4.pdf:

119 The Steering Committee considered the UK approach and also whether section 403 is clear enough in specifying that dividends may be distributed out of ―profits. The issue is whether section 403 should be modified so that dividends are payable only out of accumulated realised gains minus accumulated realised losses rather than simply profits. The question is whether or not prior accumulated losses should be cleared before payment of dividends is allowed. There are reasons why this should not be required, viz, current shareholders should not be burdened with disadvantages arising from accumulated losses. Also, accumulated losses may be caused purely by accounting conventions rather than trading losses. This may be one reason not to require clearance of accumulated losses. In any case, moving to the UK model of allowing only ―realised profits to be distributable would not be an improvement because it would complicate the issue, particularly considering that Singapore would then probably have to adopt something similar to the voluminous guidance on what amounts to ―realised profits issued by the Institute of Chartered Accountants of England and Wales.

 


Page 58 of MOF response 
www.mof.gov.sg/portals/0/Public%20Consultation/AnnexA_SC_RCA.pdf:

Recommendation 3.34

The section 403 test for dividend distributions should be retained.

Summary of Feedback Received
123. Most respondents agreed with this recommendation. Some dissenting views included: (i) the solvency test approach used in New Zealand was more holistic; (ii) “profits” should be defined and that the “middle of the road” approach set out in the report would be more prudent than the current test; (iii) the common law position that dividends were payable when there were profits in a particular year, even if the company had accumulated losses, should be included in the Act for clarity; and (iv) section 403 might be retained but a further requirement that directors should pay due regard to the effects of making a distribution on the company’s ability to meet its obligation to achieve long term shareholder value should be introduced.

MOF’s Response
124. MOF accepts Recommendation 3.34. The SC had considered the tests for dividend payments in jurisdictions like UK, Australia and New Zealand and concluded that we should retain the current position which is sufficiently well understood. While the SC acknowledged that there were some merits to the proposed “middle of the road” approach, it preferred to monitor the developments in other jurisdictions before reconsidering this issue. MOF agrees with the SC’s views. MOF is also of the view that codifying the common law position may have unintended consequences and the views expressed in (iv) above introduces uncertainty for directors.

[HitandRun]

Hi guys

My understanding is that the need for accumulated profits has been removed. I.e., a company can be losing money for 10 years since incorporation but the year it has recorded a profit, it will be able to pay dividends.

[HitandRun]

Providing Link for Clarity

Distribution of dividends. 
Companies may return cash to their shareholders via an outright distribution of dividends and this can be implemented by way of board or shareholder resolutions, or both. However, a company can only declare and pay final dividends from distributable profits and not share capital. In determining whether the company has sufficient distributable profits, it can look at both its current year as well as past years’ profits. In terms of current year profits, a company is not required to apply its current year profits to offset any accumulated losses from past years and may distribute such profits as dividends. Any past years’ profit reserves may also be distributed, including reserves created from the revaluation of assets, provided that the revaluation is not subject to short-term fluctuations and has been verified by professional valuers independently. 

[crubs]

Creative Technologies also paid out dividends in FY 2013 and FY 2014 even though it had an accumulated loss at the company level.

In 2013, Creative Technologies had a company level accumulated loss of about USD160m. The group generated about USD16.6m in profits that year and paid out a dividend of S$0.1 per share

In 2014, they had a company level accumulated loss of about USD188m. That year the group generates a loss of about USD22m and still paid a dividend of S$0.05 per share.

In fact, they have been paying dividends with a company level accumulated loss since 2009. On top of that, 2009, 2011 and 2012 were loss making years for the group too.

Specuvestor, you might want to ask about SGX about Creative too while you are asking about New Toyo and Sino Grandness

[specuvestor]

Creative Technologies also paid out dividends in FY 2013 and FY 2014 even though it had an accumulated loss at the company level.

In 2013, Creative Technologies had a company level accumulated loss of about USD160m. The group generated about USD16.6m in profits that year and paid out a dividend of S$0.1 per share

In 2014, they had a company level accumulated loss of about USD188m. That year the group generates a loss of about USD22m and still paid a dividend of S$0.05 per share.

In fact, they have been paying dividends with a company level accumulated loss since 2009. On top of that, 2009, 2011 and 2012 were loss making years for the group too.

Specuvestor, you might want to ask about SGX about Creative too while you are asking about New Toyo and Sino Grandness

Crubs you are looking at group consolidated level, not company level. Creative had US$4.4m retained profits in 2014 and (US$35m) loss in 2015 on company level. That's why their last dividend was in 2014 for S$3.76m.

HitandRun mate your link is as per I posted previously at #1705... u might want to do some housekeeping

Portuser... good link... I think it is quite clear from the links we posted that the current understanding is that current year profit can be paid out as dividends even with accumulated losses. That explains New Toyo. It is still possible that the definition of "profit" had changed based on common law understanding which is why MAS was reluctant to codify the change but leave it to interpretation.

However Sino Grandness profit was in 1Q2016. It didn't have profit in 2015 on a company level. That was the topic discussed in AGM with the auditor.

[portuser]

Specuvestor

In #1710, you reiterated the point ("the mechanics of the definition of "profit" might have changed") in #1693 as follows:

"It is still possible that the definition of "profit" had changed based on common law understanding which is why MAS was reluctant to codify the change but leave it to interpretation."

Section 403 was amended in 2005 to take account of abolition of the par value concept. You will note that section 403 previously was:

403.  (1) No dividend shall be payable to the share-holders of any company except out of profits or pursuant to section 69.

There was no reference of "accumulated profit". The amendment merely removed the underlined because section 69 (shown at the end of this post), which dealt with share premium, was repealed on the abolition of the 'par value' concept. 

The matter we have been discussing is whether companies have to clear accumulated losses before paying dividends. You have earlier maintained this should be the case. But the Steering Committee's report made it abundantly clear that payments from profits are permissible notwithstanding accumulated losses. 

We are not here to debate the merits or drawback of section 403. When the next review committee is formed, those who feel strongly should present their case to have section 403 modified. 

You have also stated "However Sino Grandness profit was in 1Q2016. It didn't have profit in 2015 on a company level. That was the topic discussed in AGM with the auditor."

Are you of the view that Sino Grandness Food Industry Group Limited has violated the law? Are you writing to SGX and ACRA?

Thank you.

...............................................................................................................................   

section 69 before being repealed in 2005 
—(1)  Where a company issues shares for which a premium is received by the company whether in cash or in the form of other valuable consideration a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called the “share premium account”, and the provisions of this Act relating to the reduction of the share capital of a company shall, subject to this section, apply as if the share premium account were paid-up share capital of the company.
....................

[specuvestor]

Portuser

I am stating what i know has been the case. Long suffering shareholders of other listco denied of dividends would know what I'm talking about. The Creative Tech example shows this understanding from the company level as well. From the links it is obvious to me that definition of profit is open to interpretation and common law, which is obvious why MAS doesnt want to codify it. You are still insisting that it is binary. Just as the 90% CA rule is interpreted differently when majority shareholders use a new vehicle to takeover. Just because one company interprets it differently, like HLA with Yuchai, does not mean that is not the position of MOST other companies. It is permissible until someone challenges it to be defined. Thats how legal system works. Just like S377A of penal code. The world is not black and white, despite what many people are thought in schools.

But once it is codified there is no way around it, because the courts will enforce it as it is legislated. Then people say it is too top-down paternalistic. End of day its a balance. 中庸之道

It's perplexing why u guys keep asking this question. I am not paid on behalf of sinogrand shareholders to write-in to ACRA and SGX. Like i said i will write-in on my leisure time to satisfy my inquisitive nature and how they interpret S403 with respect to what the directors are doing (notwithstanding their ID is a corporate lawyer and much more knowledgeable than me) and what the auditors represented in AGM. In all bureaucratic nature SGX and ACRA may just cut and paste S403 rather than answer me directly or make a stance. Ive dealt with them before and people answering questions are noob, fresh out of schools. They may or may not take interest in sinogrand depending on what is on their file on the company and what they deem is important. They have no obligation or incentive to entertain me either. Thats how the real world works. I'm just an OPMI with little interest to spend money on lawyers to challenge this. For all I know maybe profit in a quarter is deemed as "profit" to be distributable as well, since it is also not stated clearly in S403

So i just do what a good corporate citizen do with information and they do what they deem a good governance should do, within their constraints. Thats why terror reports can go unnoticed, with little relevance whether it is true or untrue, because there's constraints in the real world. Thats how the system work.