Today, we will discuss contributed surplus, another frequently misunderstood concept which is distinct from and is not to be confused with share premium.

Contributed surplus is defined under section 54(2) of the Companies Act 1981, as amended, as including “proceeds arising from donated shares, credits resulting from redemption or conversion of shares at less than the amount set up as nominal capital and donations of cash and other assets of the company”.

On the balance sheet of a company, contributed surplus appears as a separate line entry on the equity side of the balance sheet and is a quasi-equity account.

Contributed surplus differs from share premium in a number of material ways, including that (i) it is gratuitous in nature; (ii) it does not count towards the determination of a company’s assessable capital; and (iii) a company can make distributions out of its contributed surplus account that do not offend the capital maintenance rules.

Contributed surplus is a gift to the company that could be in the form of cash or other assets. The distinguishing feature is that the company does not issue shares in exchange for the contribution. Remarkably, the Companies Act is permissive; a person who is not a shareholder can make a contribution to any company.

Further, contributed surplus does not count in the determination of a company’s assessable capital, which is used to calculate the annual government fee that a company is required to pay to the Bermuda Registrar of Companies.

Finally, the contributed surplus account may be used to make a distribution, provided the company can satisfy the “solvency test” and “net asset test” as set out in section 54 of the Companies Act.

Therefore, unlike with a statutory reduction of share premium that requires, amongst other things, a legal notice to be published and shareholder consent, a company does not need to be concerned that it will be in breach of certain capital maintenance rules when utilising assets recorded in the company’s contributed surplus account.

In addition to making a distribution from its contributed surplus account to its shareholders, it is common for companies to use a contributed surplus account to off-set debt owing to its shareholders or to grant loans to its subsidiaries.

It must be underscored that a shareholder does not have a right to claim the money that has been credited to the contributed surplus account, notwithstanding that he or she may have donated any portion or all of the assets in the account.

To ensure the contributed surplus account is accurate, companies should pass a resolution approving distributions from its contributed surplus account as well as acknowledging receipt of the funds constituting contributed surplus.

While there is no statutory requirement to do so, in practice, as a matter of good corporate governance it is prudent to ensure amounts constituting contributed surplus are properly recorded and to expressly distinguish that the contribution is not for a subscription of shares.

Companies have a legal responsibility to ensure the contributed surplus account is accurate or they could face financial penalties.

Therefore, if in any doubt, please obtain legal advice on the proper characterisation and any steps required to record, reduce or distribute monies from the contributed surplus account of the company.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

Share
Twitter LinkedIn Email Save as PDF
More Publications
27 Jan 2022 |

Data Privacy Week – Your Data, Your Choice

This week is Data Privacy Week, an occasion championed by the National Cybersecurity Alliance, the A...

26 Jan 2022 |

Developments For HR Practitioners To Watch Out For This Year

Last year was a busy one in the world of labour and immigration law. A raft of changes were made to ...

20 Dec 2021 |

A Time Of Regeneration: Bermuda Can Bounce Back Better

Bermuda’s economy is a mixed bag of emerging opportunities and specific challenges. But if all sec...

17 Dec 2021 |

A Rising Tide: And Ships Are Choosing Bermuda

Bermuda must remain innovative, nimble and wary of too much regulation to stay ahead of the game, ac...

17 Dec 2021 |

A Silicon Valley For ILS

As the ILS market continues to innovate and evolve, driven by external forces including ESG, it will...

3 Dec 2021 |

Americas Restructuring Review 2022

This chapter discusses the defining features of Bermuda’s insolvency landscape and the primary ins...

2 Dec 2021 |

A growing hub for the life sector

Bermuda has become a flourishing focal point for long-term insurance and reinsurance, offering the I...

2 Dec 2021 |

Provisional liquidation in Bermuda and the selection of provisional liquidators

In the absence of a formal equivalent to English administration proceedings or U.S. Chapter 11 proce...

Contributors: Sam Riihiluoma
30 Nov 2021 |

Cryptocurrencies and estate planning

When a person dies having made a will, their personal estate is transferred to their personal repres...

26 Nov 2021 |

Whistleblowing issues for employers

In recent years there have been a number of high-profile scandals brought to light by the actions of...