FINANCIAL ASSISTANCE
Under section 123, CA 2016, a company cannot
provide financial assistance for the purpose of or in
connection with the acquisition of its shares or shares
in its holding company. These types of transaction are
prohibited unless the transaction complies with s 126,
CA 2016, Section 126 allows financial assistance to be
given by other than a public listed company if the
assistance does not exceed 10% of the shareholders'
funds and subject to fulfilment of a solvency test. The
latitude is given in line with the change from the
capital maintenance doctrine to the solvency
requirement.
Under s 123(1), CA 2016 a financial assistance
transaction involves the following elements;
(a) There is subscription or purchase or acquisition of
a company's shares
(b) There is financial assistance given by the
company whose shares are being subscribed for
purchased to any person directly or indirectly to
subscribe to or purchase the company's shares
For a transaction to be considered a financial
assistance transaction, company who shares
which is being acquired or subscribed for that
provides the assistance. Where a prospective
shareholder acquired and then uses those shares
as security, this is not financial assistance as the
company's assets are not affected."
Cheah Theam Swee v Overseas Union Bank Ltd
[1989] 1 MLJ 426 (High Court),
the existing shareholder wanted to acquire
shares in the company and obtained a loan for
that purpose. The loan was secured by a charge
over the shares owned by the shareholder in the
company. The court held that there was no
contravention of s 67(1) CA 1965 since the
company did not provide any assistance to the
purchaser in relation to the acquisition of its
shares. The shareholder as owner of the shares
can deal with the shares in any manner he wishes
and, in this case, it was not the company that
provided security for the loan.
(c) The financial assistance is given for the purpose
of or in connection with the subscription or
purchase of the company's shares. It includes
when a subsidiary provides the financial
assistance to any person to subscribe or purchase
the share in its holding company.
Armour Hicks Northern Ltd v Armour Trust Ltd
[1980] 3 All ER 833
Armour Hicks Northern (AHN): Holding company
Armour Hicks Partners (AHP): Shareholder of
AHN
Armour Hicks Trust (AHT): Subsidiary Company
AHN owed some debts to one of its shareholders,
AHP. 2 directors of AHN were also directors of its
subsidiary company, AHT. These directors caused
AHT to pay off the debts that its holding
company, AHN, owed to AHP. This resulted in
AHP transferring the shares it owned in AHN to
the 2 directors.
It was held that the decision of the subsidiary to
pay off debts of its holding company to partners
is a financial assistance transaction. Without the
directors arranging for the settlement of the debt
to AHP, AHP would not have transferred its AHN
shares to the 2 directors. This was a financial
assistance by a subsidiary for the purpose of
acquisition of shares in its holding company.
 The transfer of assets to the company could
still be a financial assistance transaction if it
was intended to put the purchaser of the
company’s shares in funds to enable him to
acquire the company’s shares.
 It is very important to ascertain from the
facts whether the acquisition of assets by
the company was genuinely for its own
benefit.
 Even if the price was fair, if it was to enable
the purchaser to have funds to acquire the
company’s shares = financial assistance
There is financial assistance if the company secure the
loan by charging the company’s assets or by being a
guarantor for the debt.
Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd &
Anor [1990] 1 MLJ 356
The Bank agreed to grant Johore Tenggara Sdn Bhd a
fixed loan of RM1,250,000 for the purchase of the
shares by the directors of the company in Hotel Rasa
Sayang Bhd. Hotel Rasa Sayang Sdn Bhd agreed to
provide security by way of creating a charge over its
assets in favour of the Bank, which intended to use
the funds to acquire shares in that Hotel. It was held
that since the provision of the security by the Hotel obtaining paid capital, the company is actually funding
was for the purpose of or in connection with the the acquisition of its shares
acquisition of the company’s shares, this was a
if the company has the intention to put the purchaser
financial assistance transaction.
of the company shares in funds to enable him to
Where a company resolves to reduce liability or waive
acquire the company's shares, there is financial
the debt owed by a shareholder to the company such
assistance. For instance, the purchaser had actually no
a decision to waive the debt is a financial assistance.
funds originally to acquire the company's shares and
was only able to do so when the company acquired an
EH Dey Pty Ltd v Dey [1966] VR 464
asset belonging to the purchaser. Important factors to
The company had issued shares to Dey and the shares consider:
were partly paid for. Mr and Mrs Paul wished to
- Whether the acquisition of assets by the
purchase the company’s shares from the
company was genuinely for its own benefit.
shareholders, including Dey. They entered into an
Where the price was at an inflated price, the
agreement where the debt owed by Dey was deemed
transaction would evidently not be in the
to have been repaid and that the sale price was
interests of the company. However, even if the
deemed to have been paid to the amount of the
price was fair, if it was to enable the purchaser to
waived debt.
have funds to acquire the company's shares or
where this was done without considering the
The court held that there was financial assistance
company's commercial interests, this might be a
because the reduction of the amount owed was in
financial assistance transaction.
connection with the share transfer between Dey and
- the company's funds have been tied up for
Mr and Mrs Paul. The reduction had influenced Mr
something which is not for the company's
and Mrs Paul to acquire the shares.
business.
- The way the transaction is scheduled would also
Differences between reduction and financial
provide some support in ascertaining whether or
assistance
not the intention was to give financial assistance.
Although a reduction of shareholder's liability owed to
financial assistance requires an analysis of the facts to
the company has been held to be a financial
determine whether the assistance is given mainly or
assistance transaction in this case, a reduction of
solely for the purpose of acquiring or enabling the
liability under s 116 or s 117, CA 2016 is not a financial
acquisition of the shares. This purpose means that s
assistance transaction. The difference can be
123(1) has been contravened. A transaction is not a
illustrated as follows:
financial assistance transaction if the acquisition of
where a person is issued 1000 shares a value of RM 1 the shares was only incidental to the transaction.
each and has partly paid for the shares, the company
a transaction is not a financial assistance transaction if
cannot waive his debt for the remaining shares unless
it is a genuine commercial transaction. the courts
these shares are cancelled. Thus, if his debt for the
have will examine the commercial realities of the
remaining 500 shares is waived or reduced as in EH
transaction to determine whether or not it can
Dry, this means that he is now the holder of 1000
properly be described as the giving of financial
shares worth RM1000 but was able obtain the shares
assistance by the company.
at only RM500 because another half of the price has
been paid by way of financial assistance. However, if Belmont Finance v Williams Furniture Ltd (No 2)
the company decides to cancel the shares which he [1980] 1 All ER 393
has not paid for so that he now holds only 500 shares
instead of 1000 shares, having paid RM500, this is not Belmont Finance was a wholly-owned subsidiary of
financial assistance but a reduction of capital. City Industrial Finance Ltd, which was the wholly
owned subsidiary of Williams furniture Ltd. The
whether or not a transaction is a financial assistance directors of Belmont caused the company to acquire
transaction the entire shareholding of Maximum. Maximum was
controlled by Mr Grosscurth, who had wanted to
consider the reduction of company's assets test.
acquire shares in Belmont Finance. that Maximum
financial assistance will involve a reduction of the
was worth £60, 000 and Belmont had paid an
company's assets, particularly where rather than
overvalued price of £500,000 for Maximum, which
enabled Mr Grosscurth to have the funds to buy
shares in Belmont from City.
It was held that there was a financial assistance given
by Belmont to Mr Grosscurth even though the
transaction resulted in Belmont acquiring an asset.
The reason was because the company directors did
not consider whether the acquisition of the asset was
in the company's commercial interests, particularly
the fact that the price for the shares was inflated.
Thus, the sale of Maximum to Belmont was not a bona
fide commercial transaction but a device to enable Mr
Grosscurth to use Belmont Finance’s own funds to
acquire Belmont Finance’s shares.
Datuk Tan Leng Teck v Sarjana Sdn Bhd [1997] 4 MLJ
329
According to the agreement, Sarjana sold land to Pasti
Hasil. RM 1M of the purchase consideration will be
capitalized as paid-up capital for 1M shares in Sarjana.
These 1M shares had been allotted to the second
defendant pursuant to a resolution passed by the
Sarjana at its extraordinary general meeting on 22
June 1992. The plaintiff who was the majority
shareholder of Sarjana Sdn Bhd commenced this
action seeking declarations to render the allotment of
the shares to the second defendant void on the basis
that this was a financial assistance transaction. It was
held that there was a financial assistance when the
company transferred its asset to the purchaser of the
company’s shares. This was because although the
assets were transferred at RM 1 million, this sum was
to be used to issue the shares of the company as fully
paid up to the purchaser. This means that the
purchaser has acquired the shares of the company at
no cost.
A debt-equity swap has been held not to be a financial
assistance transaction as it is an ordinary commercial
transaction.
Intraco Ltd v Multi Pak Singapore Pte Ltd [1995] 1 SLR
313
Multi-Pak and City Carton were once related
corporations, but City Carton ceased to be related
corporation to Multi-Pak. But these companies
continued to have common shareholders. City Carton
and its subsidiary, Box-Pak faced some financial
difficulties, and a restructuring scheme was proposed
by the companies’ creditors. The creditors, which
include Multi-Pak planned to subscribe for the shares
in City Carton and convert some of their debts into
equity. Subsequently, Multi-Pak agreed to take over
the entire amount of debts owed by City Carton and
Box-Pak to Intraco and Intraco agreed to subscribe for
the shares in Multi-Pak. The cheques related to these
transactions were issued and deposited at the same
bank at the same time. the total of the amount paid
for the shares and the amount of loan equalled the
purchase price for the debts.
The court held that this was not a financial assistance
transaction. The debt-equity swap was was part of a
reorganisation scheme was considered as an ordinary
commercial transaction. It was not entered into solely
or mainly for the purpose of enabling Intraco to
acquire the shares of Multi-Pak at no cost to Intraco.
The transaction was entered into because the
directors were of the view at that time that City
Carton could be revived and that they intended to
make City Carton a subsidiary of the Multi-Pak.
Another consideration: whether the financial
assistance transaction occurred after the shares have
been transferred and paid for.
If the alleged financial assistance transaction was
given after the shares have been paid for, there is less
likelihood that it is in contravention of s 123(1) CA
2016. Nevertheless, it would be financial assistance
transaction if a shareholder, particularly if he is a
majority shareholder, uses his voting power to cause
the company to reimburse him
Lori(M) Bhd v Arab-Malaysian Finance Bhd [1999] 3
MLJ 81
MARA was a holding company of Lori (M). Lori (M)
was managed by Technivest. MARA agreed to sell its
shares in Lori (M) to Technivest. The purchased was to
be paid by a loan obtained from Arab-Malaysian
Finance. To enable the loan to be given to Technivest,
the Bank agreed to accept several guarantees and a
charge over the land belonging to Lori (M) but the
transaction did not proceed as there were elements of
financial assistance. Several months later, Technivest
obtained loan from the Bank. The loan was to provide
Technivest working capital and security provided by
Lori (M). At this point, Technivest already acquired the
shares in Lori (M) which were fully paid for. The Court
of Appeal decided that this was a bona fide
commercial transaction. The security given by Lori
(M) was given after the shares transaction had been
completed and after the shares had been transferred
and fully paid up. There was no financial assistance.

Notes:
Where a company declares dividends in line with the
provision and a shareholder then uses such dividends
to acquire more shares in the company or pay off any
outstanding amount owed on the shares in the
company, the dividends declared and paid do not
amount to the company giving any financial
assistance.
EXEMPTED TRANSACTIONS
Section 125, CA 2016 identifies several transactions
that are no considered financial assistance
transaction. These are as follows:
(a) Where a company whose ordinary course of
business is lending money lends money in the
course of its ordinary business. This would enable
banks and financial institutions to provide loans
as part of their ordinary course of business but
the loans must be provided on ordinary
commercial terms
(b) Where a company gives financial assistance in
accordance with any employee share scheme or
share ownership scheme which is in force at the
time for fully paid shares in the company or its
holding company A company will usually enable
its shares to be acquired at a discount. These
shares are purchased or subscribed by trustees
and are to be held by or for the benefit of
employees of the company or its subsidiary
company
(c) Where a company gives financial assistance to its
employees (other than directors of the company)
or to the employees of its subsidiary to enable
them to purchase fully-paid shares in the
company or its holding company, to be held by
such persons by way of beneficial ownership. The
company will usually enable the shares to be
acquired at a discount or will provide loans to
fund the purchase of its shares by the employees,
(d) The making of a loan or the giving of a guarantee
or the provision of security in connection with
one or more loans made by one or more other
persons by a company in the ordinary course of
its business where the activities of that company
are regulated by any written law relating to
banking, insurance or takaful or which are subject
to the supervision of the Securities Commission
and re-
(i) the lending of money or the giving of
guarantees or the provision of security in
connection with loans made by other
persons, is done in the course of such
activities; and
(i) the loan that is made by the company, or,
where the guarantee is given or the
security is provided in respect of a loan,
such loan is made on ordinary commercial
terms as to the rate of interest or returns.
the terms of repayment of principal and
payment of the interest or returns
PERMITTED FINANCIAL ASSISTANCE
Section 124 provides that even if there is financial
assistance, the Act is not rendering a financial
assistance transaction invalid. It means that the
transaction is enforceable. Section 126 CA 2016 allows
financial assistance to be given by companies other
than a public listed company if
1. the assistance does not exceed 10% of
shareholders funds;
2. the board of directors passes a board resolution
in accordance with s 126(2a) , CA 1016,
3. the company receives fair value in connection
with the giving of financial assistance
10% maximum from the shaholders’ funds
In calculating that the financial assistance does not
exceed 10% of shareholders’ funds, the company
must calculate the aggregate amount of the financial
assistance that is to be given under s 126 and all other
financial assistance previously given that has not been
repaid, including the amount of ny financial assistance
given in the form of a guarantee or security for which
the company remains liable at the time the financial
assistance in question is given as in s 126(4) CA 2016.
This amount must not exceed 10% of the amount
received by the company in respect of the issue of
shares and the reserves of the company based on
most recent financial statements. The most recent
financial statements is the one that the company is
keeping and maintaining in accordance with CA 2016
but need not be the audited financial statements
Board's resolution and solvency statement
In s 126(2)(a) CA 2016, before the company gives
financial assistance, the board must pass a board
resolution at a board meeting of the following
- the company may give the assistance:
- the giving of the assistance is in the best interests
of the company, and
- the terms and conditions under which the
assistance is to be given are just and reasonable
to the company
This exercise of power is subject to fiduciary duties.
Section 126(3) requires that the board's resolution
must set out in full, the grounds for the conclusions of
the directors. This is likely to be important and
relevant for the shareholders in making their decision
whether to approve or reject the giving of the
financial assistance.
On the same day the directors pass the board
resolution, the directors who voted in favour of the
resolution must also make solvency statement as in s
113.
Solvency statement requirement:
- must be made in a manner determined by the
Registrar and signed by rich director making the
statement with the director's name and must be
dated as in section 113(1)
- must state that they have formed an opinion that
the company satisfies the solvency test in relation
to the transaction as in s 113(3)
- must take into account all of the company's
liabilities including contingent labilities
The solvency statement must state that the company
is able to fulfil the solvency test. The solvency test for
giving financial assistance is provided under 112(1),
CA 201 C which states that the company must be able
to comply with the following requirements:
(1) Immediately after transaction, there is no ground
for company not to be able to pay off its debes
(2) Either
a. if the intention is to wind up the company
within 12 months of the date of transaction,
the company will be able to pay its debes in
full within 12 months after the
commencement of winding up; or
b. in other cases, the company will be able to
pay off its debts as they fall doe during 12
months from the date of the transaction
(3) the assets of the company is more than its
liabilities at the date of the transaction
Shareholders' approval
The giving of financial assistance must be approved by
a special resolution of the shareholders. For a public
company, the special resolution can be passed at a
meeting of shareholders. For a private company, by
way of a written resolution
Time frame for financial assistance
The financial assistance can be given not more than 12
months after the day the solvency statement was
made. The company must send to each member of
the company within 14 days from giving financial
assistance;
(a) a copy of the solvency statement; and
(b) a notice containing the following information
[s 12665), CA 2016]
i. the class and number of shares in respect
of which the assistance was given;
ii. the consideration paid or payable for those
shares
iii. the name of the person receiving the
assistance and, if a different person, the
name of the beneficial owner of those
shares,
iv. the nature, the terms and, if quantifiable,
the amount of the assistance.
Consequences for contravening CA 2016
Section 123(3) CA 2016 states that of the company
provides financial assistance, it is the officer who is in
default who will be liable of an offence A
contravention carries prison term of five years or a
fine of RM100,000 or both. The company, which is
seen as the victim of the breach, is not guilty of an
offence. This is because a financial assistance
transaction protects the company's its creditors
interest If the company is made liable to a fine, then it
defeats the purpose of the prohibition as the
company's funds will have to be used to pay the
penalty, thus depleting the company's funds and
assets.
However, s 126(6), CA 2016 imposes criminal liability
on both the officer and the company of the company
fails to comply with the procedure and the
requirements for permitted financial assistance Upon
conviction, there a lability to a fine not exceeding KM3
million or imprisonment not exceeding five 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 It
is appropriate that the company officer who
contravenes s 126. CA 2016 be made liable to a fine,
in view of the officer's conduct causing the company
to contravene s126. However, s 26(6) CA 2016 also
states that t the company is also liable to a fine This is
a new provision introduced by CA 2016, the former CA
1965 did not impose any such liability on the
company. The reason for nor making the company
liable was that since the prohibition of financial
assistance transaction was to protect the company's
assets from being dissipated, it would then be
inappropriate to make the company pay a fine
Civil consequence and enforceability of the
transaction
have the locus standi to enforce the charge. However,
the majority shareholder does not have the locus
standi to the security.
Lori(M) Bhd v Arab-Malaysian Finance Bhd [1999] 3
MLJ 81
locus standi was granted to the company and any
other person which includes the banks that would be
able to enforce a security given by a company for
financial assistance transaction.

Section 123(4), CA 2016 empowers the court to order
the officer who contravenes s 125 and, who has been
convicted under the section, to compensate the
company or any other person for the loss or damage
as a result of the contravention.
Per s 331, CA 2016, prior to a financial assistance
transaction being given, the court may grant an order
to restrain the transition from being carried out or
implemented. This section can also be relied on in
relation to a share buyback and a reduction of capital

Another civil consequence relates to the validity of

the financial assistance transaction is under s 124, CA
2016, the transaction's validity cannot be challenged
on the basis that the financial assistance transaction is
prohibited. This does not mean that a transaction
which amounts to a financial assistance cannot be
challenged on other grounds. For example, the charge
could have been improperly executed by the company
or the sale and purchase of property was not a
properly concluded contract Section 124, CA 2016 also
changes the common law principle that a transaction
which is prohibited is illegal and therefore
unenforceable.

Recovery from the financial transaction

where a company provides a loan to assist a person to

acquire shares in a company, the loan is recoverable
by the company. This is provided under s 123(5) CA
2016 that confer locus standi on the company so as to
enable the company to enforce any obligation or
liability arising out of or owing to the company as a
result of the financial assistance.

In another situation, if the company uses its assets as

security, this is a prohibited financial assistance
transaction. The question is whether the charge is
valid and confer on the person in whose favour the
charge was created a right to take possession of the
assets subject to the charge. In other word, whether a
bank has locus standi to enforce a financial assistance
transaction

Datuk Tan Leng Teck v Sarjana Sdn Bhd [1997] 4 MLJ

329
although the company creating a charge in favour of
the bank so as to secure a loan to be used by the
plaintiff to acquire the company's shares was a
financial assistance transaction, the bank could still