MAINTENANCE AND REDUCTION

OF CAPITAL
PART I

Lee Jia Chern

 Introduction

• Capital of a company has to be maintained for the protection of the creditors.

• Creditors give credit to company on the belief that the capital will be used legitimately.
• Hence, a creditor ‘has a right to say that the corporation shall keep its capital and not return to its
shareholders’. – Re Exchange Banking Co (1882) 21 Ch D 519
• Once the capital of a company is raised, it must be maintained.
• Guinness v Land Corp of Ireland Ltd (1882) 22 Ch D 349

2
 Maintenance and Reduction of
Capital

Reduction of Redemption of Financial Distribution of

Capital Preference Assistance for Share Buyback Dividends
Shares Acquiring Shares

3
 Reduction of Share Capital

• General rule: Once raised, the capital of a company must be maintained. [‘capital maintenance’]
• A company is therefore prohibited from refunding capital to its members by reducing its share
capital.
• HOWEVER, there are exceptions:
i. S115(a) – reduction of capital with the Court’s confirmation; or
ii. S115(b) – reduction of capital by solvency statement.

• Re Barry Artist [1985] BCLC 283

4
Reduction of Share Capital with the Court’s Confirmation

1. s116(1) – a company may reduce its share capital by a special resolution. This
is, however, subject to confirmation by the court.
2. Ways to reduce a company’s share capital under s116(1):
i. To extinguish or reduce the liability of unpaid shares;
• Unpaid shares = debt due to the company; company can only do so when it has much funds.
ii. To cancel any lost or unrepresented paid-up shares;
• Due to the losses, these paid-up shares are not reflected in its available assets.
iii. To return to the shareholders any paid-up share capital which in excess of the company’s
needs; 5
Reduction of Share Capital with the Court’s Confirmation
– Protection for the Creditors
1. S116(2):
 if the proposed capital reduction involves
• diminution of liability of unpaid share capital;
• payment to holders of paid-up share capital; or
• any other case as directed by the court.
 every creditor, on a cut-off date fixed by the court, shall be entitled to object to the reduction;
[s116(2)(a)]
 the court shall settle a list of creditors who are entitled to object; [s116(2)(b)]
 the court may publish notices to set deadline on or before which creditors not entered on the list may
claim to be so entered; [s116(2)(b)]
6
  if a listed creditor, whose debt is not discharged or claim has not been determined, does not consent to
the reduction, the court may dispense with his consent provided the following is done: [s116(2)(c)]
• If the full amount of the debt or claim is admitted by the company, the company shall appropriate the full
amount of the debt; [s116(2)(c)(i)] OR
• If the company does not admit or is not willing to provide for the full amount of the debt or claim, or the amount
is unascertained, the Court shall fix an amount and the company shall appropriate that amount fixed by the
Court.

2. However, these requirements may be exempted by the Court if there exist any ‘special
circumstances’. [s116(3)]
• MTD Infraperdana Bhd (formerly known as Dewina Bhd) [2004] 1 MLJ 162

3. After all the prerequisites (objection of the creditors, consent of the creditors, appropriation of
certain amount of money for the creditors, if any) have been fulfilled, the Court may order to
confirm the reduction. [s116(4)]
• Ex parte Westburn Sugar Refineries Ltd [1951] AC 625
7
• Re Jupiter House Investments (Cambridge) Ltd [1985] 1 WLR 975
4. The Court order shall specify the following: [s116(5)]
• The amount of shares capital being altered;
• The number of shares to be divided; and
• The amount deemed to be paid-up on each share.

5. The Court order is to be lodged with the Registrar and the reduction will take
effect thereupon. [s116(6)]
6. The Registrar shall then issue a notice to confirm the reduction, and that notice
shall be conclusive evidence that – [s116(7)]
• all the requirements with respect to capital reduction have been complied with; and
• the share capital of the company, after reduction, is as stated in the Court order.
8
Reduction of Share Capital with the Court’s Confirmation
– Liabilities of the Members
1. S122 – After the company’s capital has been reduced, a past or present member of the
company shall not be liable for an amount greater than the difference between the issue price
of the share and the aggregate of the amount paid up on the shares plus the amount reduced
on the share.
Amount liable = Issue price of share – (Amount paid up + Amount reduced)

2. However, a member would be liable to contribute the original amount of his liability for the
unpaid shares if situation in s116(9)(a) occurs:
• A creditor is ignorant of the reduction proceedings OR the nature and effect of the proceedings with
respect to his claim, AND consequently his name is not included in the creditors’ list, AND the company is
now unable to pay him.
9
Amount liable = Issue price of share – amount paid up
 Reduction of Share Capital by Solvency Statement

1. S117(1)(a) – The company has to pass a special resolution;

and
2. S117(1)(b) – The solvency requirements in s117(3) must be
met.

10
 Reduction of Share Capital by Solvency Statement –
the Special Resolution
1. Private Company
• To be passed by a written resolution or at a general meeting [s290(1)]
• Written resolution to be circulated and agreed to by the members within 28 days. [s307(1)]
 A copy of the solvency statement to be circulated together.
 To be passed by 75% of the voting shares [ss292(1)(b), 293(1)(a)(i) and 306(4)]
• Special Resolution at a general meeting
 The proposed special resolution shall be given a 21 days’ notice;
 To be passed by 75% of the votes casted at the meeting; [s292(1)(a)
 Solvency statement available for inspection throughout the meeting. [s117(5)(b)]

2. Public Company
• A special resolution may only be passed at a general meeting.
• 21 days’ notice shall be given;
• To be passed by 75% of the votes casted;
11
• The solvency statement shall be made available throughout the meeting. [s117(6)(a)]
 Reduction of Share Capital by Solvency Statement –
the Solvency Requirements
1. S117(3) – The solvency requirements are met if
• All directors make a solvency statement in relation to the reduction; [s117(3)(a)]
• The statement is made within
 14 days after the resolution date – private company; or [s117(3)(b)(i)]
 21 days after the resolution date – public company. [s117(3)(b)(ii)]
• The company lodged a copy of the solvency statement with the Registrar together with the notice sent to
the DG of the IRB and the Registrar. [s117(3)(c)]

2. What is a solvency statement?

• S113(3) – a statement each director making the statement has formed the opinion that the company
satisfies the solvency test in relation to the transaction (reduction of share capital). 12
 Reduction of Share Capital by Solvency Statement –
the Solvency Requirements
3. What is the solvency test for reduction of capital?
• S112(1)(a) – cash flow solvency;
• S112(1)(b)(ii) – cash flow solvency; and
• S112(1)(c) – balance sheet solvency.

13
 Reduction of Share Capital by Solvency Statement –
Lodgment and Advertisement
• After the special resolution is passed, the solvency statement shall be made available at the
registered office for inspection by any creditor of the company for a period of six weeks from the
resolution date. [s117(5)(c) and s117(6)(b)]
• A notice shall be sent to the Registrar and the DG of the Inland Revenue Board within seven days
from the resolution date. [s117(1)(a)]
• The notice shall then be advertised in a Malay and an English newspapers within seven days from
the resolution date. [s117(10)]

14
 Reduction of Share Capital by Solvency Statement –
Creditors’ Right to Object the Reduction
• A creditor may apply to cancel the resolution within six weeks from the resolution date. [s118(2)]
• If there is such an application, the creditor shall serve the application on the company as soon as
possible who in turn shall notify the Registrar as soon as possible. [s118(4)]
• The Court may cancel the resolution if there is doubt as to the solvency of the company. [s120(2)]
• If the resolution is cancelled by a court order, such order shall be lodged with the Registrar.
[s120(4)]

15
 Reduction of Share Capital by Solvency Statement –
the Effective Date of the Resolution
1. No objection from the creditor
• S119(1) – company to lodge the following documents with the Registrar between the 7th and 8th week from
the resolution date:
o A copy of resolution;
o A copy of the solvency statement;
o A directors’ statement to confirm that
 Notice of resolution has been lodged with the Registrar and the DG of IRB; and
 Solvency requirements have all been complied with, and no cancellation application by the creditor.

2. A cancellation application by the creditor, but the application was dismissed, withdrawn or ended,
• S119(2) – company to lodge the following documents with the Registrar within 14 days from the date of such
dismissal, withdrawal or ending:
o A directors’ statement to confirm that
 Notice of resolution has been lodged with the Registrar and the DG of IRB;
 Solvency requirements have all been complied with;
 The cancellation application has been dismissed, withdrawn or ended.
o A copy of the court order dismissing the cancellation application; and 16

o A notice containing the information relating to the reduction of the share capital.
3. The reduction of capital will only take effect after the Registrar has recorded the information
lodged by the company. [s119(3)]
4. The Registrar shall then issue a notice to confirm the reduction, and that notice shall be conclusive
evidence that – [s119(4)]
• all the requirements with respect to capital reduction have been complied with; and
• the share capital of the company, after reduction, is as stated in the Court order.

17
 Reduction of Share Capital –
Limited Company or Unlimited Company?
• The discussions are only applicable to a limited company.
• S116(11) – this section shall not apply to an unlimited company, but nothing in this Act shall
preclude an unlimited company from reducing its share capital in any manner.
o The liability of members of an unlimited company is unlimited.
o So even when the capital of the company has been reduced, the creditor’s right to claim against the
member is not affected.
o The members will still be liable for the debts of the company due to their unlimited liabilities.

18
 Redemption of Preference Shares
• Subject to its constitution, a company is allowed to issue preference shares. [s72(1)]
• These preference shares are liable to be redeemed or the company may choose to redeem.
[s72(2)]
• The redemption of the preference shares shall not be taken as reducing a company’s share capital.
[s72(3)]
• The preference shares can only be redeemed if they are fully paid up and
o From the profits;
o From a fresh issue of shares; or
o From a capital of the company. [s72(4)]

19
 Redemption of Preference Shares
1. If the company uses its profits to redeem the shares, and the profits were supposed to have
been available for distribution of dividends, the company shall transfer an amount which is
equal to that amount of shares redeemed into its share capital account. [s72(5)]
2. If the company uses its capital to redeem the shares, the following must be complied with:
• All the directors have made a solvency statement according to s113; [s72(6)(a)]
• The company has lodged a copy of the solvency statement with the Registrar. [s72(6)(b)]

3. Within 14 days after the redemption, a notice specifying the shares redeemed shall be lodged
with the Registrar.

20