Company Law Study Notes

The share capital of a company must always be maintained.
Maintenance of capital does not imply that the company should keep its capital unutilized at all times; instead, it can be applied towards achieving the company’s objectives.
If the capital is lost due to an unprofitable venture, it is a risk that the investors must accept.
The law has established rules to ensure that share capital is effectively maintained to protect investors, particularly creditors.

Prohibitions on Capital Usage:
- A company may not purchase or acquire its own shares (known as share buyback).
- A company may not lend money using its own shares as security (financial assistance).
- A company may not provide financial assistance to any individual to facilitate the acquisition of its shares (financial assistance).
- A company may not distribute dividends unless there are sufficient profits available for that purpose (payment of dividends).
- A company must not return assets to its members or reduce its capital except in the manner provided by the Act (reduction of capital).

An unlimited company can reduce capital in any manner it chooses.
- Creditors have the right to object to such reductions.

A reduction of capital must adhere to specific protocols:
- Reduction by the court (s.116).
- Requires the company to pass a special resolution (s.116(1)).
- Must be supported by a solvency statement (s.117).
- All directors must produce a solvency statement signed by all directors.

Companies Act 1965:
- Allowance for reduction of capital is subject to:
- Confirmation by the court.
- Authorization by the company’s articles.
- A special resolution is required.
Companies Act 2016:
- A company may reduce its share capital in accordance with:
- A special resolution and confirmation by the court (s.116).
- A special resolution supported by a solvency statement (s.117).

For a company to reduce its capital:
- The company’s constitution must not prohibit it.
- Members must approve the resolution via a special resolution.
- The court must confirm the proposed reduction.
Protection for Creditors: Under s.116:
- The court shall compile a list of creditors.
- Creditors have the right to object to the reduction.
- The court may approve the reduction if it is demonstrated that creditors consented or that their debts have been settled.

The solvency statement introduces an alternative method for reducing share capital without needing to go to court.
The solvency statement must fulfill the requirements:
- No grounds for being unable to pay debts.
- The company’s assets must exceed its liabilities.
Actions Required:
- Notify the Director General of the Inland Revenue Board and the ROC within 7 days of passing the resolution.
- Send the solvency statement to members and make it available for 6 weeks at the registered office.
- Creditors may object to the resolution within 6 weeks (s.118).

A company cannot purchase its own shares, with exceptions:
- Redemption of preference shares.
- Cancellation of shares.
- Share buyback by public listed companies.

A company cannot provide financial assistance to purchase its own shares except under specified exceptions:
- Lending of money as part of ordinary business activities.
- Assistance given through employee trust schemes for share purchases.
- Financial assistance for employees for share purchases (excluding directors).
Criminal Liability:
- Officers contravening these prohibitions may face fines up to RM3 million or imprisonment not exceeding five years, or both (s.123(3)).

In Selangor United Rubber Estate Ltd v Craddock (1968): A company loaned money indirectly to a third party for share purchases. The scheme was deemed a violation of financial assistance prohibition.

A company may distribute profits only if it is solvent, meaning dividends cannot impair solvency.
Dimbula Valley (Ceylon) Tea Co v Laire (1961): Cash dividends can be paid from unrealized profits if:
- The revaluation was conducted bona fide.
- Conducted by a competent independent valuer.
- All company assets are evaluated.
- Genuine appreciation in asset value.

Directors authorizing dividends must verify that the company is solvent post-distribution (s.132(3) CA 2016).
Liabilities for wrongful dividend payments:
- Directors or managers can be liable if they distribute dividends not from profits (s.133(2) CA 2016).
- The company can recover excess amounts from shareholders unless they acted in good faith unaware of solvency issues (s.133(1) CA 2016).
Auditors may also be held liable for negligence resulting in misreported accounts, exposing the company to recompense for inaccurate dividends.

Question 1: Legal concerns about Pesta Bhd's intention to buy back shares.
- Common law prohibits companies from repurchasing own shares as it’s seen as an indirect capital reduction.
- Exceptions under s.127 CA 2016 allow PLCs to buy back shares if conditions are met, including solvency checks and proper authorization.
Question 3: Validity of EZ Bank's objection to Uphill Bhd's capital reduction.
- Validity is questionable due to the lack of adherence to required procedures under s.117 CA 2016, which mandates approval and special resolutions.
Question 5: Whether Cetak Bhd can grant Kira a loan for purchasing shares.
- The loan would contravene the Companies Act as it does not meet s.125’s exception diligence criteria, as the shares cannot be registered in someone else's name.

The maintenance of capital is critical in corporate governance, ensuring that companies adhere to the law while maintaining financial integrity and protecting creditor interests.