IMK
COMPANY LAW II : C5 MAINTENANCE OF
CAPITAL
. Reduction of share capital
- The making of solvency statement
. Redemption of preference shares
. Financial assistance for acquiring shares
1. REDUCTION OF SHARE CAPITAL
. Share buyback
. Dividends
. Reducing liability on any of the shares of the
. Solvency test and solvency statement
company (unpaid share capital)
. Law reforms
. Cancelling any paid-up share capital which is
INTRODUCTION
. Trevor v Whitworth;
the company. i.e.:
To assure to those dealing w the company
that the whole of the subscribed capital,
unless diminished by expenditure upon the
objects defined by the memorandum, shall
remain available for the discharge of its
liabilities. Issue: whether a company limited by
shares empowered by its article was
permitted to buy back its own shares from an
existing shareholder. Held: the company could
not do so as this would result in a reduction of
the company’s paid up share capital and this
would affect the interest of the company’s
creditors.
. How is it done?
. Poole v National Bank of China [1907];
Wherever a company has passed a special
resolution for reducing its capital the Court
has jurisdiction to entertain a petition at the
instance of the company, for an order
confirming such reduction. There are no other
conditions-precedent to such jurisdiction, and,
in particular, it need not be proved that the
capital which is to be cancelled is lost or
unrepresented by available assets. The
petition will be granted by the Court if the
interests of creditors are properly
safeguarded, and if the proposed reduction is
a prudent and business like measure, not
unfair to any shareholder, or detrimental to the
public.
. S. 123, 126
. Re Ratners Group Plc [1987];

The court set out the considerations for
protecting preference shareholders on the
compulsory repurchase of their shares. In this
case reductions of share premium account
was considered in order to facilitate the
writing-off of goodwill: ‘the Court will not do
anything in vain’
security. This second ground can have no
. Re Lucania Temperance Billiard Halls
(London) Ltd [1966];
Ct will also protect interest of the creditors
1
. Major changes:
- no par value shares
- A standardised solvency test
lost/unpresented by available assets
. Returning to the shareholders any paid-up
share capital which in excess of the needs of
a. Refund of moneys subscribed for shares
to the shareholders
b. By surrender of shares to the company
c. By sale of company’s capital assets and
division of the proceeds among the
members
. How is it done? S. 115
2. REDEMPTION OF PREFERENCE
SHARES
. S. 2(1): “preference share”
> Redeemable preference shares
. S. 72 & if authorised by constitution
> Redemption
. Funding by profits, fresh issue of shares &
capital in the company
. S. 72(4), (5)
> Procedure
. Solvency statement / solvency test
. S. 72(6)
. S. 112(1)
. Lodgement with ROC
3 . F I N A N C I A L A S S I S TA N C E ( B Y A
COMPANY IN DEALINGS IN ITS SHARES)
. Shearer Transport Co Pty Ltd v McGrath;
The second ground was that, even if the
debenture was illegal, the plaintiff company
was not a person for whose protection the
illegality had been created by the statutory
provision and therefore it was not entitled to
plead the illegality in order to avoid the
application to the present case because
clearly the liquidator represents one of the
classes of persons for whose protection the
statute was provided, namely the creditors,
and so in my opinion that ground may be
disregarded for present purposes.

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. Yap Sing Hock v PP;
leased back to the company for which
The purchaser created a debenture over its
existing and future assets in favour of a bank
to obtain finance to acquire shares in three
other companies. As the debenture would also
include the future assets of the purchaser in
the three companies whose shares were being
acquired, it was contended that this amounted
to financial assistance. However, the court
held that this did not constitute financial
assistance as it was not the companies that
created the debenture but the purchaser.
number of its shares on the open market.
. Chung Khiaw Bank Ltd v Hotel Rasa
Sayang Sdn Bhd;
- prohibits the purchase of its own shares by
a company bought shares in the hotel using a
loan from a bank on the security of the hotel's
land. The Supreme Court held that there was
financial assistance which was prohibited
under s 67 of the CA 1965
meeting.


. Kidurong Land Sdn Bhd v Lim Gaik Hua;
The financial assistance can be direct or
indirect. Kidurong had used all the money it
obtained from the  charge of Chen Hua's land
for the projects, ie to build the houses and
that the payments of the shares was to be by
the transfer of part of the project. The
Supreme Court found that the funding of the
project which in effect is the funding of the
houses to be transferred is any direct or
indirect financial assistance and as such is a
breach of s 67
profits and/or premium.
. Mookapillai v Liquidator Sri Saringgit Sdn
Bhd;
5. DIVIDENDS
Agmt between majority and the minority for
the company to buy back minority
shareholder’s shares, would result in
diminution of capital by returning of capital to
the members, valid only if confirmed by the
courts, company may however issue
preference share redeemable at the option of
the company and authorised by the AoA
accounts which have to be laid before the
. Simmah Timber Industries Sdn Bhd v
David Low See Keat;
This is a clear case of fraud on the company
by its director. There was a depletion of
monies due to the company when monies
were paid out to the second defendant and a
depletion of the company's assets when the
assets were transferred to the second
defendant, and thereafter, by them being
2
payments were made. The court found that it
was a cleverly planned subterfuge to deplete
the assets of the company; there was no
financial assistance to the employees of the
company to buy into the shares of the
company.
4. SHARE BUYBACK
. Buyback means repurchase by a company of
its outstanding shares that reduces the
. S. 127
. BMLR Chapter 12;
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
- Maximum limit: cannot purchase OR hold
shares as treasury shares if aggregate of
the shares purchased or held exceeds 10%
of its issued and paid-up capital.
- Purchase price: <15% above weighted
average market price for the shares for the
5 market days immediately before the
purchase
- Funding for buyback: wholly out of retained
profits/share premium accounts and there
are no restrictions on the types of funds
which can be utilised so long as the buy
back by an equivalent amount of retained
. CA 2016 changed from “dividends” to
“distribution”
. S. 131- 133
. S. 365: effect of contravention
. Marra Dev. Ltd v BW Rofe Pty Ltd;
Profits of a Company for the purpose of a final
dividend can only be understood against the
Company.
. Chip Thye Enterprise (in Liq) 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 deficiency on the balance sheet.
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. Dato Gan Ah Tee & Anor v Kuan Lee Choon [2012]; The D [and s/h] were aware of an
arbitration award against the co. which would cause a reduction in the funds of the company.
They did not make a provision 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 (M) Bhd v River View Properties Sdn Bhd [1996]; “It is my judgment
that the court will always have regard as 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 


6. SOLVENCY TEST & SOLVENCY STATEMENT

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7. LAW REFORMS

> S. 67 CA 1965 based on UK’s CA 1948

> Amended in 1992 by enabling financial

assistance transaction

> Amended in 1997 by introducing S. 67A

provided for prohibition was relaxed for public
companies and allowing PLC to buy back its
shares and give financial assistance for share
buy back

> Amended in 1998 to prohibit financial

assistance but retains the relaxation of share
buy back

> 2016 Act does not prohibit financial

assistance but must obtain shareholders’
approval and comply with solvency
requirement under S. 126

. Chung Khiaw Bank Ltd v Hotel Rasa

Sayang Sdn Bhd [1990]

Provided that this subsection is meant to

protect the company, and not a third-party
lender; and consequently, where a bank lent
money to a company for an illegal purpose in
breach of s 67, the loan was not recoverable,
and a security given by a company in
connection with such an illegal loan was
similarly void. The lender could not enforce
the security s.67(6) does not allow any other
person to enforce only the company. 


. Datuk Tan Leng Teck v Sarjana Sdn Bhd

[1997];

Financial assistance : diminution of company’s

assets. Ct: if transaction after amendment,
financier / ; Tan Leng Teck not financier : no
locus standi

. Lori (M) Bhd (Interim Receiver) v Arab-

Malaysian Finance Bhd [1999];

The security was not for the purpose of / in

connection with the acquisition of shares.

. Chung Khiaw Bank Ltd v Hotel Rasa

Sayang Sdn Bhd];

The section was enacted for the protection of

the company's funds and the interests of
shareholders as well as creditors and, we
would add, the public generally. That being
so, we can think of no valid reason why its
operation should be limited only to enabling a
company to recover loans granted by it, as
was held by the Supreme Court.