EXTINGUISHING / CANCELLING SHARES

• Reduction of share capital can happen in two main ways:

  • Extinguishing or reducing the liability on any shares in relation to any unpaid share capital.

  • Cancelling any paid-up share capital that is either lost or not represented by available assets.

  • This process may involve:

  • With extinguishing: Reducing the liability on any shares.

  • Without extinguishing: Simply reducing or cancelling shares without necessarily affecting the liability on shares.

• Solvency Statement Not Required:

  • If the reduction occurs due to cancelling paid-up share capital which is lost or not represented by available assets, the company does not require a solvency statement.

• Example of Share Capital Reduction:

  • If shares with a face value of RM10 each are fully paid but only represented by RM7 worth of assets, the company can effectuate a reduction by cancelling RM3 per share.

  • Alternatively, a company may pay back RM3 per share, reducing the face value of the RM10 shares to RM7.

PROCEDURE FOR REDUCTION OF SHARE CAPITAL

1. Pass a Special Resolution: The company's capital, considered as assets, requires the approval of a special resolution unless stated otherwise in the company’s constitution.

2. Company's Constitution: In case of conflicting provisions, the constitution prevails.

3. Legal Framework: Governed primarily by:

   • s.115 CA 2016: Provides the authority for companies to reduce share capital unless otherwise stated in the constitution.

4. Court Approval (If applicable): Requirements as per:

   • s.116 CA 2016: Court confirmation is needed unless all creditors have consented or there’s a resolution.

     • Creditor's Rights: Every creditor listed has rights to object.

5. Informing Director General of Inland Revenue Board and Registrar of Companies within 7 days of resolution.

6. Objection Period: Await a 6-week window where creditors may object.

7. Lodging Documents: If no objections arise, relevant documents are lodged with the Registrar of Companies (ROC) within 2 weeks.

8. Effectiveness: Reduction takes effect upon ROC recording the information in the register.

SOLVENCY TEST FOR CAPITAL REDUCTION

• Director's Responsibility: All directors must prepare a solvency statement declaring:

  1. The company satisfies the solvency test related to the capital reduction (per s.117(3) CA 2016).

  2. There are no grounds indicating the company cannot pay debts.

  3. The assets exceed liabilities.

• Satisfied Conditions:

  • The solvency condition is satisfied if:

  1. No grounds for inability to pay debts after the transaction.

  2. Ability to pay debts as they become due for the next 12 months.

  3. Assets are greater than liabilities at transaction date.

• Exceptions: No solvency statement necessary if the reduction is solely by the cancellation of shares that are either lost or unrepresented (as per s.117(4) CA 2016).

• Director's Liability:

  • Directors face up to 5 years imprisonment or RM500,000 fine for unsupported solvency statements (as per s.114 CA 2016).

SHARE BUYBACK

General Rule

• Prohibition (s.123(1)(b) CA 2016): Companies cannot directly or indirectly buy back their own shares, as this gives preference to shareholders over creditors, diminishing total capital.

  • Illustration:

  • Dropkat Sdn Bhd holding 75% of Modena Sdn Bhd cannot buy back shares from Mr. Danny, as it contravenes s.123(1) and s.22(1) CA.

Exceptions to Share Buyback

• Allowable Conditions (per s.127 CA 2016): Public listed companies can buy back shares if:

1. Authorized by the company’s constitution.

2. The company is solvent at the purchase date and will not become insolvent due to the purchase.

3. Purchase occurs on a stock exchange.

4. Purchase must be in good faith and beneficial for the company.

5. Complies with relevant stock exchange rules (e.g., Bursa Malaysia).

6. Majority of directors must declare solvency regarding the buyback.

SOLVENCY STATEMENT FOR SHARE BUYBACK

• Each director must declare:

  1. They have investigated the company’s affairs.

  2. They have considered all liabilities, including contingencies.

  3. The buyback is necessary.

  4. It serves the best interests of the company.

• Solvency Test Conditions: Must confirm that:

  1. Buyback won’t cause insolvency.

  2. The company retains sufficient assets and capabilities to handle liabilities post-buyback.

• Director's Penalty: Non-adherence could result in up to 5 years imprisonment or fines per s.114 CA 2016.

SHARE BUYBACK AS A REMEDY FOR OPPRESSION

• Legislative Reference (s.346 CA 2016): Provides remedies for minority shareholders affected by unfair practices or oppression, including a court order to buy back shares from oppressed members, resulting in capital reduction.

REDEMPTION OF PREFERENCE SHARES

• Preference Shares: Issuable as per the company’s constitution, redeemable under specific conditions:

  • Redemption requires that shares are fully paid.

Methods of Redemption

1. Out of profits.

2. By issuing fresh shares.

3. Out of company’s capital, requiring:

   • All directors to issue solvency statements.

   • Submitting solvency statements to the ROC.

SOLVENCY STATEMENT FOR REDEEMABLE PREFERENCE SHARES

• Directors must evaluate:

  1. They’ve examined the company's position.

  2. Reviewed all liabilities, including contingencies.

  3. Affirm company’s ability to meet debts.

  4. Confirm assets exceed liabilities post-transaction.

• Satisfying conditions ensures compliance and limits liability risks under s.114 CA 2016.

COMPANY GIVING FINANCIAL ASSISTANCE

• Prohibition (s.123 CA 2016): Disallows providing financial assistance for:

  1. Purchasing own shares.

  2. Loans given for purchasing shares.

  3. Providing security for loans made for share purchases.

Example of Prohibited Financial Assistance:

• Case reference: Selangor United Rubber Estates Ltd v Craddock (1968), demonstrating how a director’s schemes to misuse company funds for personal share purchasing has legal implications.

Exceptions to Financial Assistance

1. Ordinary Course of Business: Lending as part of regular activities.

2. Trust and Employee Schemes: Financial support in the form of loans or trusts for employees for purchasing shares.

3. Sector-Specific Regulations: Companies under strict financial regulatory supervision may be granted leeway.

4. For special resolutions not exceeding 10% of shareholder funds, except PLCs must comply with Bursa rules.

SOLVENCY TEST FOR FINANCIAL ASSISTANCE

• Directors must each declare that:

  1. Company satisfies solvency tests for providing assistance.

  2. No grounds for debt payments existence.

  3. Company assets exceed liabilities.

LEGAL CONSEQUENCES OF FINANCIAL ASSISTANCE VIOLATIONS

1. On the Contract: Contracts remain valid (not void), enabling enforcement of rights under loans or securities, as per s.124 CA 2016.

2. Third Party Liabilities: Borrowers are liable to reimburse loans derived from violations.

3. Company's Liabilities: May initiate recovery actions against borrowers for loans granted.

4. Liabilities for Lenders: They can recover loans associated with the contract, with options to claim against involved officers or guarantee claims.

5. Officers Violating FA Rules: Exposed to civil liabilities from affected parties.

DIVIDEND RULE

• Definition: Dividends can only be paid from actual profits while ensuring company solvency, and are strictly regulated under CA 2016.

Crucial Principles of Dividend Declaration

1. Financial Year Separation: Treats profits of each trading year independently.

2. Non-Cash Dividends: Requires constitutional authority to offer dividends in forms other than cash.

3. Director's Authority: Directors hold sole authority to authorize dividend distributions per s.132(1) CA 2016.

4. Solvency Statements: Directors must prepare solvency statements before distributions.

5. Consequences for Infringement: Directors may face legal action for failure to ensure compliance, subject to criminal and civil repercussions as discussed earlier.