SHARE CAPITAL & ITS MAINTENANCE

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 OUTLINE
• 1) MEANING OF SHARE
•What will you learn under this CAPITAL
topic? • 2) MAINTENANCE OF SHARE
CAPITAL DOCTRINE

• 3 ) PROHIBITIONS
• Basically on the need to ensure the
company maintain its share capital in
order to protect 2 parties:- • 4) CONCLUSION
a) Shareholders
b) Creditors
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INTRODUCTION

In order to commence business and daily activities,

company must have capital

Capital – money

A company may raise capital by issuing shares or

debentures.
 4 SHARE CAPITAL LOAN CAPITAL
TYPES OF CAPITAL

•Shares •Debt
•Shareholder •Creditors
•Dividends •Cannot attend meeting
•Can attend meetings •No voting rights
•Voting rights •In liquidation – the first
•In liquidation – the last to receive payment
to receive payment
Direct invitation to the public through prospectus

Indirect invitation through offer for sale

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Private placement
METHODS OF
Restricted invitation RAISING CAPITAL
Loans

Issuing bills of exchange

Granting charges over company’s assets

Issue of debentures
 1) Meaning of share capital

•A capital which come from shares, when

a company issue shares, the company will
obtain the capital contributed by those
who subscribe the shares.
•Section 14(3) – The application for
incorporation shall include a statement
by every person who desire to form a
company.....the details of class and
number of shares to be taken by a
member.
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 • company cannot allot
more shares than authorised in
its MOA.
MEANING OF SHARE •Case: Bank of Hindustan, China
CAPITAL & Japan Ltd v Alison – the court
held that any allotment in excess
of the authorised share capital
is void.
 SHARE CAPITAL

The amount of money contributed to the company by its members

when they subscribe to its shares

Borlands Trustee v Steel Bros Co Ltd

Section 2 (1) of Companies Act 2016 states that a share is refered as

issued share capital by a company, which includes stock. It is personal
property and transferrable. 8
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TYPES OF SHARE CAPITAL

Authorized capital – Paid Up Capital – Actual
Maximum number of Issued capital – Number of amount of shares that have
shares company can issue shares that have been been paid by the
and must be stated in the issued by the company. shareholders to the
MOA. company.

Called Up Capital – Demand Uncalled Capital – Standby

from the company to its Unpaid Capital – Difference capital (amount of share
shareholders to pay certain between called up and paid capital company have not
amount of their total up. demanded yet – sometimes
issued shares. is called reserved capital)
• AUTHORISED CAPITAL • ISSUED CAPITAL • PAID-UP CAPITAL
• 500,000 SHARES TO BE
1,000,000 SHARES ISSUED TO 2 MEMBERS • A & B PAID HALF FROM
THE ISSUED= 250,000
OF RM1 EACH EQUALLY (A & B)
SHARES

TYPE OF SHARE CAPITAL

• CALLED-UP • UNPAID CAPITAL
• THE CO DEMANDED A & B TO • HOWEVER, THE MEMBERS ONLY
PAY FOR THE REMAINING PAID 10% OF THE CALLED UP
BALANCE OF UNPAID CAPITAL CAPITAL I.E. 25,000 OF RM1 EACH

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 Example:
Company’s authorized capital is RM10 million (authorized capital)

In January 2010, company issued 1 million RM1 shares (issued capital)

10 people subscribe the shares, each is entitled to 100,000 RM1 shares but they paid 10% which is
RM10,000 – (paid up capital)
In February 2010, company demanded the shareholders to pay another 20% which is RM20,000 – (called
up capital).
However, one of the shareholders only paid RM10,000. The difference between called up capital
(RM20,000) and paid up capital (RM10,000) is unpaid capital.
Balance of another 70,000 shares is uncalled capital which the company may call anytime for the
shareholders to pay.
Let say in December 2010, 80% of the issued capital had been paid, the balance of 20% may be reserved
by the company – (reserved capital) 11
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 •CREDITORS
•IMPORTANT FOR CREDITORS BECAUSE
IT CONSTITUTE THE SOURCE OF FUND
FROM WHICH THE CREDITOR’S CLAIM
MAINTENANCE OF CAN BE MET
SHARE CAPITAL
•SHAREHOLDERS
•UPON WINDING UP, MEMBERS
ARE ENTITLED TO RETURN OF CAPITAL
AFTER ALL DEBTS HAVE BEEN PAID.
 • PAID UP CAPITAL MAY BE DIMINISHED OR LOST IN
THE COURSE OF THE COMPANY’S TRADING
• THAT IS THE RESULT WHICH NO LEGISLATION CAN
PREVENT BUT PERSONS WHO DEAL WITH, AND
GIVE CREDIT TO A LIMITED COMPANY, NATURALLY
RELY UPON THE FACT THAT THE COMPANY IS
TREVOR V WHITWORH TRADING WITH A CERTAIN AMOUNT OF
(1887) 12 Apps cas CAPITAL ALREADY PAID.
• AS WELL AS UPON THE RESPONSIBILITY OF ITS
409 MEMBERS FOR THE CAPITAL REMAINING AT CALL;
• AND THEY ARE ENTITLED TO ASSUME THAT NO
PART OF THE CAPITAL WHICH HAS BEEN PAID INTO
THE COFFERS OF THE COMPANY HAS BEEN PAID
OUT, EXCEPT IN THE LEGITIMATE COURSE OF ITS
BUSINESS (PD 423-423, AS PER LORD WATSON)

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 3) PROHIBITIONS
• GIVING FINANCIAL
• PURCHASE ITS OWN SHARES ASSISTANCE

PROHIBITIONS
• PAYING DIVIDEND OUT OF CAPITAL • REDUCING SHARE CAPITAL

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1) PROHIBITION ON COMPANY PURCHASING ITS OWN SHARES

The prohibition on a company purchasing its own shares was first expressed in
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 is to be made by two installments. Prior to the payment of second
installment, the company went into liquidation. The executor claimed the
balance from the company’s liquidator, Trevor. The company’s MOA did not
authorize the company to purchase its own shares but the AOA did. The court
held that a company had no power to purchase its own shares even if its AOA
permits 19
 3 conditions: the
company is solvent at
the date of the
The rule in Trevor v
purchase, the purchase
Whitworth has been
is made at the stock
adopted by Section 127
exchange & made in
of CA 2016.
good faith and the best
interest of the company
– 127 (2) CA 2016

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 • Section 127(2) of the CA 2016 provides that a company shall not
purchase its own shares unless:
• (a) 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;
• (b) the purchase is made through the stock exchange on which
the shares of the company are quoted and in accordance with the
PROHIBITION ON relevant rules of the stock exchange and;
• (c) the purchase is made in good faith and in the interests of the
COMPANY PURCHASING company.

ITS OWN SHARES • Notwithstanding Section 127(2)(b) of the CA 2016 above, a

company may purchase its own shares otherwise than through a
stock exchange if the purchase is:
• (a) to cancel the shares so purchased;
• (b) to retain the shares so purchased in treasury which is referred
to “treasury shares” in this Act; or
• (c) to retain part of the shares so purchased as treasury shares
and cancel the remainder of the shares.
 • The requirement under Section 127(2)(a) above is similar to
those under the CA 1965. The company shall now satisfy the
solvency test provided in Section 112(2) of CA 2016. These
requirements under the CA 2016 are also consistent with the
requirements in Regulation 18A of the Companies Regulations
PROHIBITION ON 1966. Upon satisfaction of the solvency test, the company is to
COMPANY prepare a solvency statement by majority of the directors
pursuant to Section 113(2) of the CA 2016.
PURCHASING ITS • Section 113(5) of the CA 2016 provides that where a company
OWN SHARES proposes to purchase its own shares under a share buyback,
the directors shall make a declaration that:-
(a) it is necessary for the company to buy back its own shares;
and
(b) the share buyback is made in good faith and in the interests
of the company.
 • It should be noted that all shares purchased by a company
under Section 127 of the CA 2016, unless held in treasury,
shall be deemed to be cancelled immediately on purchase
pursuant to Section 127(5) of CA 2016. Where such shares are
held as treasury shares, the company shall hold such shares in
a securities account in accordance with the relevant rules of
PROHIBITION the stock exchange or the central depository (Section 127(6),
CA 2016).
ON COMPANY • More powers are granted to directors in dealing with the
PURCHASING treasury shares under the CA 2016 in comparison to the CA
ITS OWN 1965. In addition to distributing the treasury shares as share
dividends, reselling on the market or cancelling them, the CA
SHARES 2016 allows the directors to transfer the shares, or any of the
shares for the purposes of or under an employees’ share
scheme, any of the shares as purchase consideration or sell,
transfer or otherwise use the shares for such purposes as the
Minister may prescribe.
 •Usually, a company buy back its shares
because it has an excess of capital that it
cannot effectively (or profitably) use in
its business.
•Companies that are active in managing
their capital position may find at
Why do companies buy
particular time may find they may have
back their shares?
too much equity capital and not enough
debt capital to produce optimum
returns for shareholders.
•As a result, the share values do not
reflect the true nature of the company’s
financial standing.
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 • Prohibits the purchase of its own shares by a listed
company unless the shareholders of that listed company
have first given an authorisation to the directors of the
listed company to make such purchases by way of ordinary
resolution passed at a general meeting.

• Maximum limit : cannot purchase or hold shares as

SHARE BUYBACK treasury shares if aggregate of the share purchase or held
exceeds 10% of its issues and paid-up capital.

• Funding for buyback : wholly out of retained profits/shares

premium accounts and there are no restrictions on the
type of funds which can be utilised so long as the buy back
by an equivalent amount of retained profits and/or
premium.
 BOD Bursa
RESOLUTION TO BUY BACK CO ANNOUNCE TO BURSA ABOUT
MAKE SOLVENCY STATEMENT THE SHARE BUY BACK
UNDER SEC 112 DRAFT CIRCULAR TO BE SENT TO
ALL SHAREHOLDERS
GM BURSA
APPROVAL BY ORDINARY MAKING REQUISITE
RESOLUTION ANNOUCEMENT OF MEETING’S
AUTHORISATION VALID FOR OUTCOME
CERTAIN PERIOD (CHAPTER 12 OF
BURSA LISTING REQUIREMENTS)
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 WHAT HAPPEN TO the SHARES?

the purchased shares will be cancelled; or

It will be referred as a ‘treasury shares’; or

To retain part of the shares so purchased as treasury shares and cancel the remainder of
shares.

The treasury shares will be held a securities account. It can be used as ‘share
dividend’, resell the shares or transfer the shares under the employee’s share scheme.

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 2) Prohibition to give financial
assistance to any person to
purchase its shares – sec 123
ca 2016

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MEANING OF ‘FINANCIAL ASSISTANCE’
prohibition of financial assistance remains largely the same in the new Act
compared to the Companies Act 1965 (the old Act), with both Acts
expressly stating that ‘financial assistance’ includes the granting of a loan,
guarantee or the provision of security.

The new Act further clarifies that there is financial assistance when a
company reduces or discharges any liability of a person who has acquired
shares in the company or its holding company, where the liability had been
incurred by any person in acquiring the shares.

Hence, the definition of ‘financial assistance’ as defined in the cases

discussing the old Act’s prohibition are still relevant in providing guidance
on whether a transaction constitutes ‘financial assistance’.
MEANING OF ‘FINANCIAL ASSISTANCE’

Augustine Paul J in Datuk Tan Leng Teck v Sarjana Sdn Bhd 7 defined
financial assistance as “the giving of financial assistance means making a
provision in money or money’s worth to which a shareholder was not
already entitled in his capacity as a shareholder.” It was also suggested
that for the transaction to be considered ‘financial assistance’ it must
diminish the company’s resources in some manner.

In the English case of Charterhouse Investment Trust Ltd and others v

Tempest Diesels Ltd5 , Hoffmann J described the term ‘financial
assistance’ as having ‘no technical meaning’ and referred to the language
of ordinary commerce. Hence the commercial realities of the transaction
must be examined to decide whether it could be properly described as
the giving of financial assistance by a company.
 1997 SEC 67A OF CA 1965
Allow public company to buy back its shares & to
give financial assistance for shares buy back.

history
1998
SECTION 67A WAS AMENDED
Only public company can undertake shares
buy back

2016 SECTION 126 CA 2016

Not prohibited but allowed
under this section – solvency
statement
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SECTION 123
•SECTION 123(1)
•THIS SECTION 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.

•SUBSIDIARY CO
•ALSO, IF THE COMPANY IS A SUBSIDIARY, ANY
SHARES IN ITS HOLDING COMPANY
 •Has the same detrimental effect
on the company’s financial
position of self – acquisition and
can infringe the capital
maintenance doctrine.
Why the law prohibits it? •To prevent the wastage of
capital.
•The company is not prevented
from recovering the loss from
the offender as stated in Section
123(4) CA 2016.
 •Section 125
•Lending money by the
company is in the ordinary
course of its business
Exceptions to sec 123 •In accordance to the scheme
for the benefit of the
employees
•Bona fide in the employment
of the company

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 What amount to financial assistance?
Belmont Finance v Williams Furniture (a company making a gift to
a person, which is used to acquire shares)
Chung Kiaw Bank v Hotel Rasa Sayang (a company guaranteeing a
loan by a third party to a person to acquire shares in the company)
EH Dey Pty Ltd v Dey (reducing liability of a person in connection
with the acquisition of the company’s shares)

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 •Grosscurth wanted to acquire shares in
Belmont Finance. He controlled a
company name Maximum. He sold to
Belmont the entire shareholding of
Belmont Finance v Maximum.
Williams Furniture Ltd & •The funds he obtained were used to
finance the share acquisition of
Ors Belmont Finance.
•Held: There was financial assistance
given by Belmont to Grosscurth even
though the transaction resulted in
Belmont acquiring an asset.
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 • Plf gave loan to a company named Syarikat
Johor Tenggara. The company used the
fund to purchase shares in Defendant. The
loan was secured by D, by creating a
charge over its property and assets.
• When the company defaulted in payment,
Chung Kiaw Bank v Hotel P wanted to enforce the security.
Rasa Sayang [1990] 1 • Held: There was a financial assistance.
MLJ 356 However, P could not enforce the security
because before 1992 amendment, Section
67(6) did not allow any person other than
the company to recover loan or any
amount given in contravention of that
section.

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 • Two directors of P were also directors of its
subsidiary company.
• The holding company owed one of its
shareholder.
• The directors of P managed to get the
Armour Hicks Northern subsidiary company to pay debts of its
holding company and the shareholder then
Ltd v Armour Trust Ltd transferred shares in the holding company
to the directors.
• Held: without the directors arranging for the
settlement of the debt to the shareholder,
the shareholder would not transferred the
shares to the directors. This was financial
assistance by a subsidiary for the purpose of
acquisition of shares in its holding company.40
 • Dey was a shareholder of Eh Dey Pty Ltd. He
owed a sum of money to the company for the
shares he had taken but not fully paid.
• Mr. and Mrs paul wanted to buy these
shares.
EH Dey Pty Ltd v Dey • P passed a resolution reducing the amount
owed by D to the company.
[1996] vr 464 • Mr. and Mrs Paul then acquired shares at a
lower price.
• Held: This was financial assistance because
the reduction of the amount owed was in
connection with the share transfer between D
and Mr. & Mrs Paul.

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 • MARA offered to sell its shares in Lori to
Technivest (T). T obtained loan from bank,
security was several guarantees and a charge
over land belonging to Lori.
• 3 months later, bank obtained confirmation from
T that the shares which T purchased had been
transferred and fully paid up prior to the giving
Lori (M) Sdn Bhd v Arab of loan and the creation of security.
Malaysia • T defaulted payment and the bank applied to
court to enforce the security.
• Held: The transaction did not amount to financial
assistance as this was a bona fide commercial
transaction. Bank had been given undertaking
that transfer of shares was concluded when they
gave loan and obtained security.

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 • the section prohibits a company to provide
financial assistance for the acquisition of its own
share or shares of its holding company unless
otherwise provided in the Act. The company
cannot give any financing to the purchaser
himself or to another party. It is immaterial that
FINANCIAL the shares are purchased directly from the
ASSISTANCE – company or from a third party.
SECTION 123 • It is also pertinent to note that section 123(1)
prohibits only the company whose shares are
being purchased or the targeted company’s
subsidiary from giving financial assistance to the
purchaser of its shares. It does not prohibit the
purchaser from obtaining financial assistance
from other sources
 • The concept of the prohibition against a company in giving financial
assistance for the purchase of its own shares or shares of its holding
company is originated from the case of Trevor v Whitworth.
• In this case, the company in dispute had purchased its own shares
from the respondents. The company later underwent winding-up and
a shareholder applied to court for the balance of amounts owed to
FINANCIAL him after the buyback. One of the questions arising was whether the
ASSISTANCE – company had the power to purchase its own shares. The court held
that the company was not entitled to purchase its own shares even
SECTION 123 though it was authorized by the articles of association, as this will
result in a reduction of share capital.
• The statutory provision clearly provided that a company could
increase its capital but not diminish it. Furthermore, it was aimed at
protecting the interest of creditors as they have the right to rely on
the fact that the company will not reduce its capital by returning any
part of the capital to its shareholders.
 • The English case of Trevor v Whitworth was referred to
in Mookapillai & Anor v Liquidator, Sri Saringgit Sdn Bhd
& Ors.
• In this case, the Federal Court held that the act of the
company in purchasing its own shares was contrary to
FINANCIAL section 67 of Companies Act 1965. Furthermore, it also
ASSISTANCE – amounted to an illegal reduction of the company’s
issued capital.
SECTION 123 • In a recent case, Lai Chu Sing v Lai Teck Sian & Ors, the
court held that the underlying principle governing this
prohibition was that it may cause dissipation of a
company’s assets, to the detriment of the company’s
financial position and the shareholders’ interests.
 • The rationale for the prohibition of any financial assistance
to purchase a company’s own shares was elaborated by
Lord Greene M.R. in the case of Re VGM Holdings Ltd as
follows:

FINANCIAL • “… a very common form of transaction in connection with

companies was one by which persons - call them
ASSISTANCE – financiers, speculators, or what you will - finding a
SECTION 123 company with a substantial case balance or easily
realizable assets such as a war loan, bought up the whole
or the greater part of the shares of the company for cash
and so arranged matters that the purchase money which
they then became bound to provide was advanced to them
by the company whose shares they were acquiring, either
out of its cash balance or by realisation of its liquid
investments…”
 • The legislative purpose of section 123 is to preserve the company’s capital and
to prevent the use of its assets in connection with an intended acquisition of
its shares. It may dissipate a company’s assets to the detriment of the financial
position of the company and is prejudicial to the interests of the shareholders.
If a company is allowed to purchase or assist in the purchase of its own shares,
it would cause a reduction in the company’s value and inflates the share price
above its market level. Allowing the financial assistance would lead to
FINANCIAL depletion and reduction of company’s capital.

ASSISTANCE – • The prohibition also serves to protect the interests of the company’s creditors
SECTION 123 and shareholders. In general, the creditors have an interest to ensure that the
assets of the company are used in the ordinary course of business. If the
company’s assets are depleted to the extent that the company may not
continue the business, this would prejudice creditors, especially if they are
unsecured in an insolvency situation. In terms of protecting shareholders’
interest, the interests of the shareholders may be prejudiced if the company
does not use its funds in the advancement of the objects of the company as
stated in the memorandum. The company funds should be used for only
activities or transactions stated in the object clause.
 • the prohibition of financial assistance can be seen as a
rule to supplement directors’ fiduciary duties,
particularly their duties to act bona fide and in the
company’s best interests. The use of a company’s
resources to financially assist a purchase solely or
FINANCIAL primarily to make the acquisition of shares will be an
instance that it is not a proper exercise of directors’
ASSISTANCE – duties. The directors need to consider their fiduciary
SECTION 123 duties to their company when they approve
dispensation of financial assistance for share
purchase. Hence, the Companies Act 2016 imposes a
severe penalty for directors of a company
contravening the prohibition, which is a fine not
exceeding three million ringgit, imprisonment for a
term not exceeding five years or both.
 • a company whose shares are not quoted on a stock exchange may, by a special resolution, give
financial assistance in accordance with Section 126 of the CA 2016 for the purpose of the
acquisition of a share in the company or its holding company or for the purpose of reducing or
discharging a liability incurred for such an acquisition if:-
• (a) the directors resolve, before the assistance is given, that:-
• the company may give the assistance;
• (i) the giving of the assistance is in the best interest of the company; and
FINANCIAL • (ii) the terms and conditions under which the assistance is to be given are just and reasonable to
the company;
ASSISTANCE • (b) on the same day that the directors passed the resolution, the directors who voted in favour
of the resolution make a solvency statement in compliance with provisions in relation to the
– SECTION giving of the assistance;
• (c) the aggregate amount of the assistance and any other financial assistance given under
123 Section 126 of the CA 2016 that has not been repaid does not exceed 10% of the aggregate
amount received by the company in respect of the issue of shares and the reserves of the
company, as such aggregate amount is disclosed in the most recent audited financial statements
of the company;
• (d) the company receives fair value in connection with the giving of the assistance; and
• (e) the assistance is given not more than 12 months after the day on which the solvency
statement is made under paragraph (b).
 • The financial assistance is limited to 10% of shareholders’ funds. Thus it will not
substantially affect the equity structure of a company. In addition , another
safeguard for directors who voted in favour of such resolution is to provide solvency
statement which will make them liable if their solvency statement is untrue or
breached.
• Section 126(5) provides that the company shall within 14 days from giving financial
assistance under Section 126 send to each member of the company a copy of the
solvency statement and a notice containing the following information:
FINANCIAL • (a) the class and number of shares in respect of which the assistance was given;
• (b) the consideration paid or payable for those shares;
ASSISTANCE • (c) the name of the person receiving the assistance and, if a different person, the
name of the beneficial owner of those shares;
– SECTION • (d) the nature, the terms and, if quantifiable, the amount of the assistance.
123 • This notification provision is to ensure that all members of the company are aware
of the financial assistance given by the company.
• The hefty penalty imposed on anyone in breach of any provisions under Section
126 of the CA 2016 will definitely deter them from committing an offence
thereunder. The company and every officer who contravenes Section 126 of CA
2016 commits an offence and shall, on conviction, be liable to a fine not exceeding
RM3 million or imprisonment not exceeding 5 years or to both and, in the case of a
continuing offence, to a further fine not exceeding RM1,000 for each day during
which the offence continues after conviction.
 3) Prohibition on companies
paying dividend out of capital

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 • The term “dividend” under the CA 1965 has been replaced by
“distribution” under the CA 2016. In accordance with the
introduction of the solvency test by the CA 2016, Section
131(1) of the CA 2016 now provides that a company may only
make a distribution to the shareholders out of profits of the
company available if the company is solvent, subject to Section
132 of the CA 2016.
DIVIDENDS
• In other words, companies are now required to satisfy the
solvency test before it can proceed under Section 131(1) of the
CA 2016.

• An additional criteria of “available profits” is imposed under

the CA 2016 compared to mere “profits” under the CA 1965.
 • Before a distribution is made by a company to any shareholder, such
distribution shall be authorized by the directors of the company
pursuant to Section 132(1) of the CA 2016.
• In addition, section 132(2) of CA 2016 provides that the directors
may authorize a distribution at such time and in such amount as the
directors consider appropriate, if the directors are satisfied that the
company will be solvent immediately after the distribution is made.
DIVIDENDS • For the purposes of Section 132 of CA 2016, the company is
regarded as solvent if the company is able to pay its debts as and
when the debts become due within 12 months immediately after
the distribution is made. The requirement that directors are now
required to be satisfied that the company will be solvent
immediately after the distribution is made is a new provision under
the CA 2016.
 • Section 132(4) provides that if, after authorization of a
distribution but before it is made, the directors cease to be
satisfied on reasonable grounds that the company will be solvent
immediately after the distribution is made, the directors shall take
all necessary steps to prevent the distribution from being made.
• It should be noted that penalties for contravening the provision of
this section are now increased. Section 132(5) of the CA 2016
DIVIDENDS states that without prejudice to any other liability, every director
or officer of the company who willfully pays or permits to be paid
or authorizes the payment of any improper or unlawful
distribution shall, on conviction, be liable to imprisonment for a
term not exceeding 5 years or a fine not exceeding RM3 million.
The fines are increased from RM250,000 under the CA 1965 to
RM3 million under the CA 2016.
 •Section 131(1) CA 2016 expressly stated
that dividends must be declared only out
of profits if the company is SOLVENT.
•Therefore, directors of company cannot
DIVIDENDS declare dividends out of capital.
•This provision is designed to prevent a
reduction of capital being disbursed as
payment of dividends out of a company’s
issued capital.

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 • There is no necessity for there to be
available profits when the dividend is
actually paid; what is more important is that
there were available profits when the
dividend was declared (Marra Development
Ltd v BW Rofe (1977) 3 ACLR 185
• Source of profits must derive from the
company itself which declares and pays
MEANING OF PROFITS? dividend – Industrial Equity Ltd v Blackburn -
profits belonging to the subsidiary cannot
be applied to pay dividend of its holding
company because it is a natural
consequences of doctrine of separate legal
entity.
• Dividends must not be declared in
anticipation of earnings – Re Given Estate
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 • A company which has lost part of its
capital can lawfully declare or pay
dividends without first making good the
capital which has been lost – Verner v
General and Commercial Investment Trust
• A company is at liberty to pay dividend
even if the available profit at the time of
declaring the dividend is not equivalent to
DIVIDENDS its nominal or share capital, unless the
articles say otherwise - Lee v Neuchatel
Asphalte
• Profits available for dividend mean the
profits which the directors consider
should be distributed after making
provision for past losses, for reserves or
for other purposes
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 • CHIP THYE ENTERPRISE V PHAY GI MO & ORS
No available profit liquidator had access to company’s financial records as current
liabilities exceeds current assets and a net deficientcy on the balance sheet

DATO GAN AH TEE & ANOR V KUAN LEE CHOON (2012)

Hre D (shareholder) were aware of an arbitration award against the co. which
would cause a reduction in the funds of the company. They did not mke provisions
DIVIDENDS for this award in the accounts – the accounts did not reflect the company’s true
financial positions. Directors knew that the payment was not out of available
profits. Shareholders had knowledge and were liable as constructive trustees for all
the payments of dividends received

BSN COMMERCIAL BANK V RIVER VIEW PROPERTIES SDN BHD (1996)

It is my judgement that the court will always have regards s to whether the
disposition was made bona fide in the course of the company’s current trade, and
if not validated, the trade of the company would be paralysed without any
advantage.
 4) Prohibition to reduce the
share capital- sec 115

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• Generally, company is not allowed to
reduce its share capital except
in accordance with the Companies
Act 2016
• The rationale behind this is that
reduction of capital is treated as
return of assets to the shareholders
and the effect would be to reduce
assets that are available for
distribution to creditors should the
company goes into liquidation.
• The provision in relation to reduction
of share capital is mentioned in
Section 115 where company may
reduce its share capital in 2 ways.
 •Section 115 of the CA 2016
provides that a company may
reduce its share capital by (i) a
special resolution and
confirmation by the Court in
Reduction of Capital accordance with Section 116 of
the CA 2016 or (ii) a special
resolution by a solvency
statement in accordance with
Section 117 of the CA 2016.
Merchant Credit Pty Ltd v Industrial & Commercial Realty Co Ltd
• MC WAS SET UP AS A JOINT VENTURE BETWEEN
INDUSTRIAL COMMERCIAL BANK (ICB) AND ARTHUR
LIPPER INTERNATIONAL LTD (ALI).
• IT WAS AGREED THAT ICB AND ALI WOULD TAKE 47.5%
OF MC’S SHARE CAPITAL EACH.
• MC PROPOSED TO DEVELOP AN ICE SKATING COMPLEX
AND THE COSTS OF THE PROJECT WAS OVER
$1MILLION.
• ICB AGREED TO SUBSCRIBE 332, 500 SHARES WHICH
WERE TAKEN UP BY ICR, A WHOLLY-OWNED
SUBSIDIARY OF ICB.
• PAYMENT WAS MADE TO MC, THE BALANCE TO FUND
FOR THE PROJECT WAS ADVANCED BY ALI.
• ISSUE OF SHARES WAS DEFERRED UNTIL THE PROJECT
GOT APPROVAL.
The project was abandoned because the
planning permission could not be obtained.
ICR then commenced proceeding claiming
the return of 332, 500 together with
interest.
The court held that ICR were not entitled
to have their money back as the money
was paid for shares and not as loan.
MC have no power to return the money
without reduction of capital which could
only be affected by leave of court.
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 Ways to reduce share capital

• COURT SANCTIONS PROCEDURE • SOLVENCY STATEMENT

• Sec 117 CA 2017
•Sec 115 CA 2016. • Private and public company may undertake this exercise
without resorting to court sanction process.
•2 conditions to satisfy: • Only need to provide a solvency statement as required
under this section
• Special resolution
approving the reduction;
and
• Court must confirm the
reduction

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Means to reduce share capital
Section 116 (1)(a)– Company may extinguish/reduce
the liability on any of its shares in respect of share
capital not paid up.

Case: Re Doloswella Rubber & Tea Estate Ltd

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 • The company was incorporated with
the object of developing rubber
estate in Ceylon of about 8000 acres.
• Its issued capital was divided into 640
£500 shares which £185 per shares
had been paid.
Re Doloswella Rubber & • After its incorporation, the company
Tea Estate Ltd limit the area for cultivation to 4000
acres and consequently it did not
require the whole of its issued
capital.
• The company proposed to reduce its
share capital to £300 per share and
the amount paid up were
apportioned accordingly.
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 •Section 116(1)(b) – a company may
cancel any paid up capital which is lost /
unrepresented by available assets.
•Case: Re Rhodesian Manufacturing Co.
REDUCTION OF SHARE Ltd
CAPITAL •Section 116(1)(c) – a company may pay
off any paid up share that is in excess of
its needs.
•Case: Re Fowlers Vacola Manufacturing
Co. Ltd

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 • Company’s issued capital comprised
of:
a. 44, 360 £1 A shares
b. 19, 000 £1 B shares
• All issued shares were fully paid.
Case: Re Rhodesian • The company had made losses where
its net assets only amounted to
Manufacturing Co. Ltd £12,555.
• The company reduced the nominal
value of A shares to £0.75 each. This
reduction resulted in bringing the
issued capital in line with the net value
of its assets.

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 •The company abandoned its food
canning business and consequently
had capital in excess of its needs.
Case: Re Fowlers Vacola •It resolved to reduce its capital and
Manufacturing Co. Ltd return the excess to its ordinary
shareholders.
•This was done by reducing the
nominal value of ordinary shares.

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 •Section 116 gives the opportunity to all
creditors of the company to object to the
REDUCTION OF SHARE reduction.
CAPITAL •Section 116 provides that the court may
make an order confirming the reduction
on terms and conditions as it thinks fit.

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 •Re Muex’s Brewery Co - The court
would not allow a reduction of share
capital of the company if it would
discriminate the creditor in the sense
that the company’s liability to the
creditor would not be made.
Confirmation of Court •Re Holder Investment Trust – Other
than the interest of creditor, the just
and equitable treatment of
shareholders must also be considered
by the court in order to allow
confirmation for proposal to reduce
share capital.

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Thank you

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