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SHARE CAPITAL & ITS

MAINTENANCE
MUHAMMAD UMAR BIN ABDUL RAZAK
FACULTY OF LAW
UITM

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

Basically on the need to ensure the 3 ) PROHIBITIONS

company maintain its share capital


ICON

in order to protect 2 parties:- 4) CONCLUSION


a) Shareholders
b) Creditors
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1) MEANING OF A capital which come from
SHARE CAPITAL shares, when companies issues
shares, the companies will
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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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AUTHORISED CAPITAL

ISSUED CAPITAL

TYPE OF PAID-UP CAPITAL

SHARE CALLED-UP CAPITAL


CAPITAL UNPAID CAPITAL

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AUTHORISED CAPITAL ISSUED CAPITAL PAID-UP CAPITAL
500,000 SHARES TO BE
1,000,000 SHARES A & B PAID HALF FROM
ISSUED TO 2
THE ISSUED= 250,000
OF RM1 EACH MEMBERS EQUALLY (A
SHARES
& B)

TYPE OF SHARE CAPITAL


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

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CREDITORS
2) IMPORTANT FOR CREDITORS BECAUSE IT
CONSTITUTE THE SOURCE OF FUND FROM

MAINTENANCE
WHICH THE CREDITORS CLAIM CAN BE
MET

OF SHARE
CAPITAL SHAREHOLDERS
UPON WINDING UP, MEMBERS ARE
ENTITLED TO RETURN OF CAPITAL
AFTER ALL DEBTS HAVE BEEN PAID.

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PAID UP CAPITAL MAY BE DIMINISHED OR LOST
IN THE COURSE OF THE COMPANYS TRADING;
THAT IS THE RESULT WHICH NO LEGISLATION

TREVOR V CAN PREVENT BUT PERSONS WHO DEAL WITH,


AND GIVE CREDIT TO A LIMITED COMPANY,
NATURALLY RELY UPON THE FACT THAT THE

WHITWORH COMPANY IS TRADING WITH A CERTAIN AMOUNT


OF CAPITAL ALREADY PAID, AS WELL AS UPON
THE RESPONSIBILITY OF ITS MEMBERS FOR

(1887) 12 APPS THE CAPITAL REMAINING AT CALL; AND THEY


ARE ENTITLED TO ASSUME THAT NO PART OF

CAS 409
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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COMPANIES
ACT 1965
VS
COMPANIES
ACT 2016
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PROVISIONS
WHICH
UNDERWRITING COMMISSIONS UNDER SECTION 58
THE COMPANY PAID ANOTHER PERSON TO SUBSCRIBE ITS

PREVENT
SHARES UPON LISTING ON BURSA. IN RETURN, THE
PERSON WILL BE PAID WITH CERTAIN COMMISSION.

WASTE OF ISSUE OF SHARES AT DISCOUNT UNDER SECTION 59

SHARE CAPITAL ISSUE SHARES BELOW PAR VALUE I.E. 0.50


SEN.

UNDER THE
COMPANIES ISSUE OF SHARES AT PREMIUM UNDER SECTION 60
ISSUANCE OF SHARES ABOVE PAR VALUE

ACT 1965 DUE TO THE GOOD PERFORMANCE IN THE


PREVIOUS YEARS. VALUE INCREASES.

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SHARES TO BE ISSUED
WITHOUT PAR VALUE
SHARES WILL BE ISSUED AT A
PRICE
SHARE PREMIUM ACCOUNT
NO PAR VALUE AND THE CONCEPT OF
AUTHORISED CAPITAL WILL NO
REGIME LONGER BE APPLICABLE
TRANSITIONAL PERIOD OF 24
MONTHS WILL BE GIVEN FOR
THE COMPANY TO UTILISE THE
AMOUNT IN THE COMPANYS
SHARE PREMIUM ACCOUNT

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NOMINAL OF PAR VALUE IS
ONLY APPLICABLE AT THE
POINT OF ISSUANCE OF

RATIONALE SHARES. THE ACTUAL VALUE


OF THE COMPANY WILL

FOR THE VARY IN ACCORDANCE WITH


THE CURRENT SITUTATION

MIGRATION : OF THE COMPANY.

THE ISSUED PRICE OF


SHARES WILL BE
DETERMINED BY THE
CURRENT VALUE OF THE
COMPANY.
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3) PROHIBITIONS
PURCHASE ITS OWN
GIVING FINANCIAL ASSISTANCE
SHARES )

PROHIBITION
PAYING DIVIDEND OUT OF S REDUCING SHARE CAPITAL
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 companys
liquidator, Trevor. The companys 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

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The rule in Trevor v Whitworth has been
adopted by Section 127 of CA 2016.

3 conditions: the company is solvent at the date


of the purchase, the purchase is made at the
stock exchange & made in good faith and the
best interest of the company 127 (2) CA 2016
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Usually, a company buy back its shares
because it has an excess of capital that
WHY DO it cannot effectively (or profitably) use in
its business.

COMPANIES Companies that are active in managing


their capital position may find at
BUY BACK particular time may find they may have
too much equity capital and not enough

THEIR debt capital to produce optimum returns


for shareholders.

SHARES? As a result, the share values do not


reflect the true nature of the companys
financial standing.

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BURSA
MAKING REQUISITE ANNOUCEMENT OF MEETINGS OUTCOME
APPROVAL BY ORDINARY RESOLUTION
GM
AUTHORISATION VALID FOR CERTAIN PERIOD (CHAPTER 12 OF BURSA
LISTING REQUIREMENTS)
CO ANNOUNCE TO BURSA ABOUT THE SHARE BUY BACK Bursa
DRAFT CIRCULAR TO BE SENT TO ALL SHAREHOLDERS
RESOLUTION TO BUY BACK BOD
MAKE SOLVENCY STATEMENT UNDER SEC 112
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 employees 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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1997 SEC 67A OF CA 1965
Allow public company to buy back its
shares & to give financial assistance for

HISTORY 1998
shares buy back.

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(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.

SECTION 123 SUBSIDIARY CO


Also, if the company is a subsidiary, any shares in its holding
company

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WHY THE LAW PROHIBITS IT?
Has the same detrimental effect on the companys financial
position of self acquisition and can infringe the capital
maintenance doctrine.
To prevent the wastage of capital. To protect the
creditors

The company is not prevented from recovering the loss from


the offender as stated in Section 123(4) CA 2016.

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Section 125
Lending money by the company
is in the ordinary course of its

EXCEPTIONS business
In accordance to the scheme

TO SEC 123 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 companys shares)

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BELMONT FINANCE V WILLIAMS
FURNITURE (NO 2) [1980] 1 ALL ER
393
Grosscurth wanted to acquire shares in BF. He controlled a company
called Maximum. He sold his shares in Maximum to BF.
The funds he obtained were used to finance the acquisition of BF.
Held: There was a financial assistance by BF to Grosscurth.

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CHUNG KIAW BANK V HOTEL RASA
SAYA NG [1990] 1 MLJ 356
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, P wanted to enforce the security.
Held: There was a financial assistance. 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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EH DEY PTY LTD V DEY [1996] VR
464
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.
P passed a resolution reducing the amount owed by D to the company.
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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LORI (M) SDN BHD V ARAB
MALAYSIA
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 of loan and the creation of security.
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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3) PROHIBITION ON COMPANIES
PAYING DIVIDEND OUT OF
CAPITAL

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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 declare
DIVIDENDS dividends out of capital.
This provision is designed to
prevent a reduction of capital
being disbursed as payment of
dividends out of a companys
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

MEANING OF company itself which declares and pays


dividend Industrial Equity Ltd v Blackburn -
profits belonging to the subsidiary cannot be

PROFITS? 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
A company which has lost part of its capital
can lawfully declare or pay dividends without
can lawfully declare or pay dividends without
first making good the capital which has been
first making good the capital which has been
lost Verner v General and Commercial
lost Verner v General and Commercial
Investment Trust
Investment Trust
A company is at liberty to pay dividend even if
A company is at liberty to pay dividend even if
the available profit at the time of declaring the
the available profit at the time of declaring the
dividend is not equivalent to its nominal or
dividend is not equivalent to its nominal or
share capital, unless the articles say
share capital, unless the articles say otherwise
otherwise - Lee v Neuchatel Asphalte
- Lee v Neuchatel Asphalte
Profits available for dividend mean the profits
Profits available for dividend mean the profits
which the directors consider should be
which the directors consider should be
distributed after making provision for past
distributed after making provision for past
losses, for reserves or for other purposes.
losses, for reserves or for other purposes

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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 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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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.

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MERCHANT CREDIT PTY LTD V
INDUSTRIAL & COMMERCIAL
REALTY CO LTD
MC was set up as a joint venture between Industrial
The project was abandoned because
Commercial Bank (ICB) and Arthur Lipper the planning permission could not be
International Ltd (ALI). obtained.
It was agreed that ICB and ALI would take 47.5% of
ICR then commenced proceeding
MCs share capital each.
claiming the return of 332, 500 together
MC proposed to develop an ice skating complex and with interest.
the costs of the project was over $1million.
The court held that ICR were not entitled
ICB agreed to subscribe 332, 500 shares which were
taken up by ICR, a wholly-owned subsidiary of ICB.
to have their money back as the money
was paid for shares and not as loan.
Payment was made to MC, the balance to fund for the
project was advanced by ALI.
MC have no power to return the money
without reduction of capital which could
Issue of shares was deferred until the project got
approval.
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
2 conditions to satisfy: undertake this exercise without
Special resolution resorting to court sanction
approving the process.
reduction; and Only need to provide a solvency
Court must confirm the statement as required under this
reduction section

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CONCLUSION
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TASK FOR THE STUDENTS
To find out what is solvency test ?
What are the remedies for the breaches ?
How do the creditors and shareholders are being
protected under CA 2016

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THANK YOU
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