JUN 2019

QUESTION 3

Safespace Bhd is an unlisted public company providing data protection and storage facilities.

i. Spacesafe Bhd plans to dispose of some of its investments in other companies. Conbit
Sdn Bhd made an offer to acquire Safespace’s shares in Sky Sdn Bhd, of which Safespace
own 75%. The sale scheme will involve Sky Sdn Bhd charging its assets in order to
finance the purchase of its shares by Conbit Sdn Bhd. The board plans to present this
proposal to the shareholders for approval.

ii. Safespace Bhd has passed a board resolution to waive the unpaid amount of shares by a
shareholder for the shares issued by Safespace to the shareholder in 2016. These shares
are registered as fully paid up in the register of members.

iii. Safespace Bhd has issued shares to some of its employees who have exercised their right
under an employee share scheme established in 2000. These shares were issued at a
fixed price of RM3.50 per share whereas the market price for the shares is RM7.00 per
share.

Advise Safespace Bhd:

a. Whether the above transactions contravene the Companies Act 2016, and (12 marks)
b. If they do contravene, what may the board do to avoid such contravention of the Companies
Act 2016? (8 marks)

Answer (a.i):

Purchase by a company of its own shares will be void even though it may be authorised by
its AOA or sanction by a general meeting of its members. It is entirely irrelevant that the purchase of
the shares might be beneficial to the company or is in any way in the interests of the company or its
members as a whole.

This rule originated from the case of Trevor v Whitworth. In this case, the executor of
Whitworth, a deceased shareholder of the company (James Schafield & Son Ltd), sold his shares in
the company to it. Payment was to be made by two instalments. Prior to the payment of the second
instalment, the company went into liquidation. The executor claimed the balance from the
company’s liquidator, Trevor. The company’s MOA did not authorise the company to purchase its
own shares but the AOA did. It was held that a company had no power to purchase its own shares
even if its AOA permits it. This is due to the purchase of its own shares by a company would amount
to a return of capital to its shareholders and cause reduction in the company’s paid up capital which
would, in the end, affect the creditor’s interest in the company and jeopardise the creditor’s
protection.

The rule in Trevor v Whitworth has been adopted by Section 127 of CA 2016. Section 127(2)
of the CA 2016 provides that a company shall not purchase its own shares unless; the company is
solvent at the date of the purchase and will not become insolvent by incurring the debts involved in
the obligation to pay for the shares so purchased, the purchase is made through the stock exchange
on which the shares of the company are quoted and in accordance with the relevant rules of the
stock exchange, and the purchase is made in good faith and in the interests of the company.

Answer (a.ii)

According to s.123(1), it prohibits the company from giving financial assistance,

whether directly or indirectly either by loan, guarantee, or security, to any to person to purchase its
own shares.

In the case of EH Dey Pty Ltd v Dey, the defendant was a shareholder of the plaintiff
company, who owed a sum of money for the shares that had been issued to him but had not been
fully paid for. A married couple wanted to purchase those shares. The company passed a resolution
reducing the amount owed by the defendant to the company, to allow the couple to acquire the
shares at a lower price. Held: The reduction in the amount owed by the defendant was a form of
financial assistance to allow the shares to be transferred to the couple, which caused the company’s
share capital to reduce.

Answer (a.iii)

In the case of Merchant Credit Pty Ltd v Industrial & Commercial Realty Co Ltd, Merchant Credit
was set up as a joint venture between Industrial Commercial Bank (ICB) and Arthur Lipper
International Ltd (ALI). Merchant Credit proposed to develop an ice skating complex, the cost of
which was over $1 million. ICB agreed to subscribe 332,500 shares which were taken up by ICR, a
wholly-owned subsidiary of ICB. Payment was made to Merchant Credit and the balance to fund the
project was advanced by ALI. The project was later abandoned as the planning permission could not
be obtained. ICR then commenced proceedings claiming the return of 332,500 together with
interest. It was held that a company limited by shares cannot convert its share capital into a loan and
purport to return the money obtained. Thus, ICR is not entitled to have their money back as the
money was paid for shares and not as a loan. Unsubscribing the shares of the company would
ultimately reduce the company’s share capital. Thus, Merchant Credit has no power to return the
money to ICR without a reduction of capital which could only be affected by a leave of court.

If they do contravene, what may the board do to avoid such contravention of the Companies Act
2016? (8 marks)