12 Bbus2103 T8

Topic  Share Capital
8 and Capital
Maintenance
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Elaborate the difference between share capital and loan capital;
2. Explain the types of shares and the rights attached to each type of
share and how a company varies the rights;
3. Identify the rationale behind the prohibition of buying back shares
and giving financial assistance;
4. Apply the relevant procedures relating the share buybacks and
reduction of capital; and
5. Discuss the requirements for the distribution of dividend.
 INTRODUCTION
Capital is defined as the money or assets that a company uses to undertake its
business activities. There are various methods for the company to raise its capital
internally or externally such as through the issuance of shares or borrowing money
from external parties. This topic will discuss various rules relating to share capital
including definition of shares, type of shares, class rights, variation of class rights
and procedures to alter share capital. Generally, the company is required to
maintain its capital and ensure the capital is available to discharge its liabilities
subject to few statutory exceptions. This topic covers the concept of capital
maintenance which is designed to protect the interest of the creditors including the
rules on share-buyback, financial assistance, reduction of capital and dividends.
Copyright © Open University Malaysia (OUM)

TOPIC 8 SHARE CAPITAL AND CAPITAL MAINTENANCE  101
8.1 SHARE CAPITAL AND LOAN CAPITAL

Capital can be divided into share capital and loan capital. The differences between
debt capital and share capital are described in Table 8.1.
Table 8.1: Differences between Share Capital and Loan Capital
Share Capital Loan Capital

It is a long-term capital as it is made up Capital is provided for a short term
of money or assets that are contributed and is expected to be repaid.
by people who proposed to be members
of the company.
Has control in terms of voting. No control in terms of voting.
Has distribution rights. No or limited control rights and
distribution rights.
Return on investment upon availability Return on investment at specific
of profits. interval, irrespective of profits.
8.2 SHARES
Capital derived from the issuance of shares is called as „share capital.‰ The capital
is the property of the company, not the shareholders. However, upon the issuance
and registration of the share, the shareholders enjoy certain rights in the company.
The shares are considered as moveable property and can be transferred from one
person to another.
8.2.1 Definition and the Legal Characteristics of a

Share
It is stated in the case of BorlandÊs Trustee v Steel Bros & Co Ltd (1901) 1 Ch 279
that shares represent the interest of a shareholder in the company as measured by
a sum of money for the purpose of liability in the first place and of interest in the
second. Section 70 of CA 2016 describes shares in a company as personal property
and is transferable.
Section 69 provides that shares in a company may be issued in different classes,

subject to the constitution of the company. Section 89(1) states that shares are in
the same class if the rights attached to them are identical in all respects.

102  TOPIC 8 SHARE CAPITAL AND CAPITAL MAINTENANCE
It is stipulated in Section 89(2) that the rights attached to shares are not to be
regarded as different from those attached to other shares in the same class only
because they do not carry the same rights to dividends in the twelve months
immediately following their allotment subject to the companyÊs constitution.
8.2.2 Why are Shares Issued with Different Rights?

There are several reasons why a company issues shares with different rights. They
are as follows:
(a) To distinguish control rights and distribution rights. For example, a company
may want to issue shares with no or limited voting rights to prevent the
dilution of the voting power of the existing shareholders. In this case, the
company is interested to issue preference shares which carries limited voting
power. In return, the preference shareholders are entitled to a fixed dividend
in priority to the ordinary shareholders. For example, in a small private
company managed by family members, different voting rights and
entitlement to dividends may be given (Aiman Nariman & Effendy Othman,
2018).
(b) To distinguish the period of involvement in a company. For example,

redeemable preference shares may be issued to cater to certain investorsÊ
interests who want to invest for a certain period in the company. The
redeemable preference shares confer the holders the right to redeem the
shares at a certain point in time.
(c) To cater to different capital needs (from an investorÊs perspective, it is to

accommodate different risk profiles and investment strategies.) For example,
a company may prefer to issue preference shares to raise capital as an
alternative to loans or borrowings to avoid high interest rates (Aiman
Nariman & Effendy Othman, 2018).
8.2.3 Where are the Rights Stated?

The rights are stated in the terms of issue (contractual) or may be recorded by a
resolution of the companyÊs board of directors while the rights attached to
preference shares must be expressly stated in the companyÊs constitution. For a
newly incorporated company, this needs to be determined at the time of
incorporation. Rights may be varied subsequently. The classification of shares
depends on the rights attached to the shares.

According to Section 90 of CA 2016, a company that has different classes of shares

must state in its constitution that the companyÊs share capital is divided into
different classes of shares and the voting rights attached to shares in each class. If
the company issues shares with no voting rights at the general meeting, the shares
must be described as such in the share certificate, prospectus or directorsÊ report.
8.2.4 Voting Rights, Entitlement to Dividends and

Priority for Payment of Dividends
The typical rights of a company that is an ongoing concern are as follows:
(a) Voting Rights

Ordinary shareholders are entitled to vote at the general meeting, which
gives them the right to participate in the decision-making process of the
company. Unlike ordinary shareholders, preference shares do not confer
voting rights to preference shareholders. However, preference shareholders
may be entitled to vote in a very limited situations.
(b) Entitlement to Dividends

Generally, ordinary shareholders are entitled to the profit of the company in
the form of dividends. The rate of the dividend is determined by the directors
and approved at the general meeting. However, the dividend for the
preference shareholders is fixed in the form of percentage, for example, five
per cent.
Preferential dividends can be divided into cumulative and non-cumulative

dividends. Cumulative dividend entitles the preference shareholders to
carry forward the unpaid dividends of the previous year.
(c) Priority in Relation to Payment of Dividends

Preference shares have a better rate of dividend as a trade-off for limited
voting rights.
8.2.5 Typical Rights Upon Winding Up

Typical rights upon winding up are as follows:
(a) Priority in Repayment of Capital upon Winding Up

A return of capital can only be done upon winding up if there are assets left
after settling the creditorsÊ debts. Preference shares confer preference
shareholders the right to be repaid upon winding up in priority to ordinary
shares.

(b) Sharing of Surplus Profits and/or Assets upon Winding Up

Ordinary shareholders are entitled to the surplus of assets upon winding up.
However, preference shareholders are not entitled to surplus of profits or
assets unless expressly given in the companyÊs constitution or terms of issue.
8.3 TYPES OF SHARES

Unless otherwise provided by the companyÊs constitution, a company may issue
several class/type of shares. Shares may be divided into different class of shares
based on rights attached to the shares. The most common type shares are ordinary
shares (by virtue of Section 71 of CA 2016), preference shares and redeemable
preference shares (by virtue of Section 72 of the CA 20167).
8.3.1 Ordinary Shares and Preference Shares

It is stipulated in Section 71 that ordinary shares in a company confer the holders
the right to:
(a) Attend, participate and speak at the general meeting;
(b) Vote on a show of hands on any resolution of the company; and
(c) An equal share in the distribution of the surplus assets or the right to an equal
share in dividends authorised by the board, subject to the companyÊs
constitution.
A company may issue preference shares subject to the companyÊs constitution.

Preference shares are shares which do not entitle the holder the right to vote or to
participate beyond a specific amount in the distribution of dividend or on
redemption in winding up or otherwise. These have been stipulated in Section 72
of CA 2016.
Section 90(4) states that the constitution shall set out repayment of capital,
participation in surplus, profits and assets, cumulative or non-cumulative
dividends, voting and priority of payment of capital. Paragraph 7.06 of Bursa
MalaysiaÊs Listing Requirements provides few matters that preference
shareholders are entitled to vote for.

Para 7.06 Bursa MalaysiaÊs Listing Requirements
Preference shareholders are entitled to vote on the following:
 Dividend or part of dividend in arrears;
 On a proposal to reduce the companyÊs share capital;
 On a proposal for the disposal of the whole of the companyÊs property,

business and undertaking;
 On a proposal that affects rights attached to the share;
 On a proposal to wind up the company; and
 During winding up.
8.3.2 Redeemable and Convertible Preference Shares

Preference shares, which are issued with the terms of issue, may provide that the
shares maybe redeemed at a future date or upon occurrence of certain events.
Redeemable preference shares are preference shares that are issued with the option
of being redeemed at a future date, redeemable at the companyÊs option. These
shares can be issued if authorised by the companyÊs constitution and the
preference shares which are to be redeemed must have been fully paid for.
The redemption shall be out of profits, fresh issue of shares or capital of the
company. The redemption out of capital of the company is subject to all directors
having made a solvency statement and the company has lodged a solvency
statement to the Registrar.
Preference shares, which are issued with the terms of issue may provide that they
may be converted into equity shares at a future date or upon occurrence of certain
events.

8.3.3 Issuance and Allotment of Shares

In the case of Raja Khairulzaman Shah bin Raja Aziddin & Ors v Zaman Indah Sdn
Bhd (1979) 2 MLJ 181, it was stated that allotment is the appropriation of a certain
number of shares to a person, though not necessarily specific shares. A share is
said to be issued when the shareholder is put in control of the shares allotted to
him. Directors may exercise power to allot shares after obtaining the approval, that
is, resolution by the company (by virtue of Section 75).
The approval could be specific or general, with or without condition. The approval
would be valid until the next annual general meeting or the period to hold annual
general meeting expires, or not more than twelve months after it was given. Public
companies are required to hold their annual general meeting as stated in
Section 340. However, private companies are not required to hold an annual
general meeting. The new position in relation to the issuance of shares under the
CA 2016 in contrast with the old regime under the Companies Act 1965 are as
follows:
(a) All shares issued have no par or nominal value. A company can issue shares
at issue price without being required to state the nominal value of the share;
(b) Issuing shares at a premium, share premium account and issuing shares at a
discount are no longer relevant; and
(c) Upon incorporation, the company is not required to state the authorised
share capital.
The approval may be revoked or varied at any time according to the companyÊs
resolution. A company must register the allotment of shares in the register of
members within 14 days from the date of the allotment as stated in Section 77.
Types of Share Issues
 Initial public offering (IPO)
 Private placement
 Rights issues
 Bonus issues
 Dividend reinvestment plan

8.3.4 Alteration of Share Capital

Unless otherwise provided in its constitution, a company may by special
resolution alter its share capital. This is done by consolidating and dividing all or
any of its share capital, converting its paid-up shares into stocks or vice versa and
subdividing its shares or any of the shares.
8.3.5 Variation of Class Rights

Rights attached to shares may be varied from time to time based on the companyÊs
specific needs and conditions. For example, when a company is not in a good
financial position, it may find the current preferential dividends too burdensome
and may propose to change, say from five per cent to three per cent. This amount
to variation of class rights and the company can only proceed with the proposal
through certain procedures.
THE TEST OF VARIATION IS WHETHER THE HOLDER OF A CLASS OF

SHARES WILL STILL HAVE THE SAME CLASS RIGHTS AFTER AN
AMENDMENT HAS BEEN MADE.
The issuance of new preference shares ranking equally with the existing preference
shares is also variation based on Section 91(5).
In the case of White v Bristol Aeroplane Co Ltd, (1951) Ch 65, the court held that
the issuance of new ordinary shares ranking equally with the existing ordinary
shares is not variation unless the companyÊs constitution states so.

Examples:
(a) Alteration of Existing Rights
The company changes the preferential dividend from 8% p.a. to 5% p.a.
(b) Deletion or Abrogation of existing Rights
The company deletes „cumulative‰ preference shares or the entitlement
to surplus of assets upon winding up.
(c) Changing the Method to Vary Class Rights
The company may incorporate the procedures of variation of class rights
in its constitution, that is, the modification of rights clause (Section 91(1)).
Any amendment to the existing procedures is also considered as
variation. For example, if the procedure of variation as stated in the
constitution is through special resolution passed by the shareholders in
the class, any change from special resolution to ordinary resolution is also
considered as variation (Section 339(6)).
8.3.6 Procedures of Variation

Where there is a proposal that involves a variation of the rights of a class of shares,
the approval of the shareholders of that class is required. Section 91(2) stipulates
that variation can be done in accordance with the companyÊs constitution, with the
consent of the shareholders in that particular class, in other words, written consent
of not less than 75 per cent of the total voting rights of the shareholders in the class
or by a special resolution.
Shareholders representing 10 per cent of the total voting rights in the class may apply
to have the variation disallowed. According to Section 93, the court will disallow the
variation if it is satisfied that variation would unfairly prejudice the shareholders.
SELF CHECK 8.1
1. How do you define „shares‰?
2. Explain the different types of shares.
3. Explain what are class rights.
4. Explain the process and procedures of variation of class rights.

ACTIVITY 8.1
Preferential shareholders in Company A Sdn Bhd are entitled to five per

cent fixed dividends as stated in the companyÊs constitution. Company A
Sdn Bhd intends to reduce the dividends from five to three per cent.
Explain the procedures that Company A Sdn Bhd needs to follow before
varying the preferential shareholders rights.
8.4 CAPITAL MAINTENANCE

The main rationale of capital maintenance rules is to protect the interest of the
companyÊs creditors who, in the eyes of the law, have interests in the companyÊs
capital and assets. When a creditor gives credit to the company, there is
expectation that the capital of the company should be maintained and cannot be
returned to the shareholders to ensure that the company is able to discharge its
liabilities towards the creditors when the debt becomes due:
„⁄it follows that whatever has been paid by a member cannot be returned to him.
In my opinion, it also follows that what is described in the memorandum as the
capital cannot be diverted from the objects of the (company). It is, of course, liable
to be spent or lost in carrying on the business of the company but no part of it can
be returned to a member so as to take away from the fund to which the creditors
have a right to look as that out of which they are to be paid.‰ [Refer to Guinness v
Land Corps of Ireland Ltd (1882) 22 Ch D 349, 375)].
8.4.1 Share Buy-back

Section 123(1) of CA 2016 prohibits:
(a) A company from giving any financial assistance, whether directly or
indirectly, and whether by means of a loan, guarantee or the provision of the
security or otherwise to any person for the purpose or in connection with a
purchase or subscription of any shares in the company;
(b) A subsidiary company from purchasing any shares in its holding company;
or
(c) A company from purchasing, dealing in or lending money on its own shares.

Section 127 allows a public listed company to purchase its own shares if so
authorised by its constitution. Section 127 must be read together with Para 12.03
of the Bursa Malaysia Listing Requirements (BMLR) which states that „a listed
corporation must not purchase its own shares unless its shareholders have, by
ordinary resolution passed at a general meeting, given an authorisation to its
directors to make such purchase(s).‰
However, Section 127(2) states that a company is not allowed to purchase its own
shares unless:
(a) The company is solvent at the date of the purchase and will not become
insolvent by incurring debts involved in the obligation to pay for the shares
so purchased;
(b) The purchase is made through the stock exchange, in accordance with its
rules, exception can be found in Subsection (3), if permitted by the relevant
rules of stock exchange; and
(c) The purchase is made in good faith and in the interest of the company.
In order to determine whether a company is not insolvent at the time of the

purchase, the company must satisfy a solvency test. Section 112(2) states that a
company satisfies a solvency test as follows:
Company will not become insolvent and its capital is not impaired at the date of
the solvency statement or company remains solvent during 6 months after date of
declaration, that is, solvency statement.
Section 112(3) further explains when a company is deemed to be solvent and when
the capital of the company is deemed to be impaired:
„A company is deemed to be solvent if it is able to continue to meet its debts as

and when the debts become due without any substantial disposition of its assets
out the ordinary course of its business.‰
Section 113(1) laid down the procedures for issuing a solvency statement:
(a) The solvency statement must be signed by each director making the
statement;
(b) Stating that the company satisfies the solvency test and that they had made
inquiries into the affairs of the company as well as taking into account the
liabilities of the company; and

(c) Directors declare that it is necessary to execute share buy-back and the share
buy-back is made in good faith and in the interest of the company in
accordance with Section 113(5).
According to Paragraph 12.11 of BMLR, a company may use borrowings as a

source of funds to purchase its own shares. This must be read together with the
solvency requirement as stipulated under Section 127(2), Section 112 and Section
113.
According to Section 114, a director who has made an insolvency statement

without reasonable grounds commits a criminal offence and upon conviction, shall
be liable for imprisonment for a term not exceeding five years or a fine not
exceeding RM500,000 or both.
In the event that a company has purchased its own shares, the directors of the
company may either decide to cancel the shares so purchased or retain the shares
as treasury shares; or retain part of the shares and cancel the remainder of the
shares in accordance with Section 127(4), or unless held in treasury, all shares so
purchased shall deemed to be cancelled by virtue of Section 127(5).
Section 127(7) stipulates that where shares are held as treasury shares, the directors
may:
(a) Distribute the shares as dividends to shareholders;
(b) Resell the shares in accordance with the rules of the stock exchange;
(c) Transfer the shares under employee shares scheme;
(d) Transfer the shares as purchase consideration;
(e) Cancel the shares; or
(f) Sell, transfer or use the shares for such other purposes as described by the
Minister.
8.4.2 Financial Assistance

Section 123 prohibits a company to give any financial assistance whether directly
or indirectly to any person for the purpose of or in connection with a purchase or
subscription of shares in the company.
„The words (giving financial assistance) have no technical meaning and their
frame of reference is in my judgement the language of ordinary commerce. One
must examine the commercial realities of the transaction and decide whether it can

properly be described as the giving of financial assistance by the company.‰ (Refer

to Charterhouse Investment Trust Ltd & Ors v Tempest Diesels Ltd (1986)
BCLC 1, 10.)
Financial assistance can be in the form of a loan, guarantee and security:

(a) Given by a company to purchase its shares;
(b) Given by a subsidiary to purchase shares in the holding; or
(c) By reducing or discharging liability incurred for the acquisition of shares in
the company or holding company.
Note:
In the case of Cheah Theam Swee [1989] 1 MLJ 426 at 440, it was held that the
assistance must come from the company, not from the shareholders.
Though financial assistance contravenes Section 123, Section 124 states that the
financial assistance and any transactions connected with it are still valid.
Section 125(a) to (d) provide exceptions to Section 123. A company is not

prohibited from giving financial assistance where:
(a) The lending of money is part of the ordinary business of a company;
(b) The provision of money by a company for the purchase of or subscription for
shares in accordance with any scheme for the benefit of employees including
directors (held in trust);
(c) The giving of financial assistance by a company will enable its employees to
purchase shares in the company (by way of beneficial ownership); and
(d) The making of a loan or the giving of guarantee or provision of security in
connection with loans by a company when the activities of the company are
regulated by any written law relating to banking, insurance or takaful.
In addition to Section 125 (general exceptions), Section 126 of CA 2016 allows a company
to provide financial assistance without contravening the Companies Act. Section 126 is
not, however, applicable to public listed company. Its requirements are:
(a) Pass a Resolution

The Board of Directors pass a resolution before the company may give
financial assistance and the giving of the financial assistance is in the best
interest of the company, and the terms and conditions under which the
assistance is given is just and reasonable to the company.

(b) Solvency Test

Before the financial assistance is given, a company must ensure that the
transaction satisfies the solvency test under Section 112(1)(a) to (c):
(i) Immediately after a transaction, there is no grounds for the company to
be unable to pay off its debts;
(ii) Assets must be more than liabilities at the time of transaction;
(iii) If it intends to commence the winding up of the company within twelve
months after the date of the transaction, the company will be able to
pay its debts in full within 12 months after the commencement of the
winding up; or
(iv) The company is able to pay its debts as they fall due during 12 months
from the date of transaction.
(c) Approval at the General Meeting

(i) A company must pass a special resolution to give financial assistance;
and
(ii) Financial assistance must be given 12 months after the solvency
statement is made.
(d) Additional Requirements

(i) Aggregate amount of the financial assistance and any other financial
assistance that had not been repaid does not exceed 10 per cent of the
issuance of shares and reserves of the company (shareholdersÊ funds)
based on most recent financial statements; and
(ii) The company receives fair value in giving financial assistance.
Effects of Financial Assistance

(a) Section 123(3) states that an officer who contravenes Section 123(1) will be
liable to a fine or imprisonment (criminal liability);
(b) According to Section 123(4), the court may order the officer to compensate
the company for the loss suffered (civil liability); and
(c) Section 123(5) provides that a company or person may recover the amount
of any loan, guarantee or security made on any financial assistance given.

ACTIVITY 8.2
1. What is the rationale of the capital maintenance rule?
2. Explain the process and procedures of share buy-back.
3. What constitutes a financial assistance?
4. Can a company give financial assistance without contravening the

CA 2016?
ACTIVITY 8.3
A Sdn Bhd is planning to give financial assistance to Mr Raju in order for

him to buy shares in the company (A Sdn Bhd). Discuss how can A Sdn
Bhd give financial assistance to Mr Raju without contravening Section 123
of the CA 2016.
8.5 REDUCTION OF SHARE CAPITAL

Generally, a company is prohibited from reducing its share capital as it has the
effect of reducing the assets that are available for the creditors if the company goes
into liquidation.
However, Section 115 provides an exception whereby a company may reduce its
share capital according to two methods, namely through a court sanction
procedure or through a solvency statement procedure (special resolution
supported by a solvency statement).
8.5.1 Court Sanction Procedure (Section 116)

A company may reduce its share capital in any of the following ways:
(a) Extinguish or reduce the liability on any of its shares in respect to unpaid
share capital whereby the company issues partly paid shares and may later
carry out a reduction of capital by cancelling the uncalled amount that is no
longer required (Aiman Nariman & Effendy Othman, 2018).

(b) Cancel any paid-up capital which is lost or unpresented by available assets.
A company may lose money during its trading and the amount shown as
paid-up capital in a companyÊs financial statement may no longer reflect the
value of its assets. The company may wish to cancel some of its capital so
that the balance sheet would give a more accurate view of the companyÊs
financial position (Aiman Nariman & Effendy Othman, 2018).
(c) Returning any paid-up share capital which is in excess of the needs of the
company to the shareholders. Example: A company sold a substantial part
of its business operations, thus, resulting in excess capital. The company may
reduce its capital by returning the excess capital to its members.
The propose capital reduction under Section 116 must be approved by the
members of a company through a special resolution and must be subject to the
confirmation of the court.
Section 116(2) provides creditors with the following protection:

(a) The court must be satisfied that the reduction will not prejudice the creditors,
in other words, the company must be able to pay its creditors;
(b) Section 116(2)(a) states that creditors are entitled to object to the reduction of
the share capital;
(c) If the court is not satisfied that the company has the ability to settle its debts
or creditors may be prejudiced, the court has the power to order a creditorÊs
inquiry. This, however, is a tedious and time-consuming process.
It is to be noted that Section 116(3) states that the court may not apply Subsection(2)
if „special circumstances‰ exist (for example, sound financial standing or sufficient
assets).
8.5.2 Solvency Statement Procedure (Section 117)

Section 117 of CA 2016 lays down the procedures for a solvency statement. A
company may reduce its share capital by a special resolution if the company meets
the solvency requirements as follows:
(a) Section 113 provides that a solvency statement must be signed by all
directors in relation to the reduction of share capital and shall be made within
14 days for private companies or 21 days for public companies before the
special resolution in Section 117(5) and (6) can be passed. The solvency
statement is made based on solvency test in Section 112(1)(a), (b) and (c).

(b) Section 117(5) relate to the procedures for private companies while
Section 117(6) is for public companies. Solvency statement should be made
available:
(i) For inspection by the members during the meeting to pass the special
resolution; and
(ii) At the companyÊs registered office for inspection by creditors within six
weeks from the date of the resolution.
For private companies, in case of written resolution, a copy of the solvency

statement should accompany it.
Furthermore, creditors have the right to object and may apply to the court within
six weeks to cancel the special resolution by virtue of Section 118 and Section 119.
A company must advertise the notice of reduction of the share capital in one
widely circulated newspaper in Malaysia in the national language and in the
English language, and send it to the DG IRB and the Registrar within seven days
from the date of the passing of the special resolution as provided in Section 117(10)
and (1).
The notice must state that the resolution has been passed and contained the text of
the resolution as well as the resolution date. If there is no creditorsÊ application or
if the application has been dismissed by the court, the company is required to
lodge the relevant documents with the Registrar based on Section 119(1) and (2).
The reduction of share capital will take effect when the Registrar has recorded the
information lodged with him in the appropriate register, in accordance with
Section 119 (3).
8.5.3 Dividend
Dividend is defined as payment made towards shareholders by a corporation,
which is usually the distribution of profits (O'Sullivan & Arthur, 2003). A company
cannot use the funds or money which it has raised from the shareholders to pay
dividend as it amounts to illegal return of capital to the shareholders and is
considered as a fraud by the creditors because the company would be less able to
pay its debts.
It can be said that the right of shareholders to dividends is not absolute but rather
a conditional one. The decision to distribute dividend is a matter of internal
management and is depending on the availability of profit.

The general rule is that a company is not bound to declare dividend but once the
declaration has been made, it becomes a debt owed by the company to the
shareholders. The declaration cannot be revoked or cancelled and the amount of
the declared dividends cannot be reduced. Once declared, the dividends must be
immediately payable unless stipulated to be paid later.
Dividends can be paid to the shareholders in the form of cash or by issuing fully
paid up shares. For example, by virtue of Section 127(7)(a), treasury shares may be
distributed as dividend by the directors.
Section 132(1) provides that a company can only distribute the dividend after the
directors have authorised the distribution while Section 132(2) states that the
directors may authorise a distribution in such amount as the directors consider
appropriate, if the directors are satisfied that the company will be solvent after the
distribution is made.
A company may only make a distribution to the shareholders out of the available
company profits and if the company is solvent, in accordance with Section 131.
Section 132(3) states that for a company to be regarded as a solvent company, it

must be able to pay its debts as and when the debts become due within 12 months
immediately after the distribution is made. This is also known as trading solvency.
Note:
In the case of Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and
Others (2004) MSCLC 97, the court mentioned about either trading insolvency
or balance sheet insolvency. However, the Companies Act 2016 only refers to
trading solvency. Balance sheet insolvency means a test to ascertain from a
company's balance sheet, what would remain available to members of the
company if it were to be wound up and a company is deemed to be insolvent
if the liabilities exceed the assets (Collins Dictionary of Law, 2006).
Section 132(4) states that if, after distribution is authorised, the directors cease to
be satisfied on reasonable grounds that the company will be solvent⁄., the
directors shall take all necessary steps to prevent the distribution from being made.
There is no statutory meaning of profit under the CA 2016. According to the case
of Re Hume Industries (Far East) Ltd (1950-1985) MSCLC 419, profit available for
dividend means the profit that the directors consider should be distributed after
making provision for past losses, reserves or for other purposes.

Under Section 132(5), every director or officer who permitted the payment of
improper or unlawful distribution would be liable to imprisonment or fine.
Section 133(2) states that every director or manager who wilfully permits dividend
to be paid which he knows is not profits shall be liable to compensate the company.
The company may recover the amount of distribution which exceeds the value
from the shareholders under Section 133(1), unless the shareholders received the
distribution in good faith and has no knowledge that the company did not satisfy
the solvency test.
SELF CHECK 8.2
1. Explain the procedures of capital reduction under Section 115

of CA 2016.
2. Define „dividend‰.
3. Explain the requirements that a company needs to fulfil before

declaring dividends.
 Capital is defined as the money or assets which is necessary for a company to

undertake its business activities.
 Capital can be categorised into share capital and loan capital.
 A company may issue different types of shares such as ordinary shares,

preference shares, redeemable preference shares and others, depending on the
companyÊs needs.
 The different types of shares carry different rights such as voting rights,
entitlement to dividends and priority in payment of dividend, rights upon
winding up and so on.
 A company cannot vary or alter the shareholdersÊ rights without going

through proper procedures laid down in the companyÊs constitution and the
CA 2016.

 Generally, a company is prohibited from returning capital to its shareholders

except during the winding up as it is against the maintenance of the capital
rule.
 A company may return capital to its shareholders in the form of share buy-
back, reduction of capital and dividend payment, among others, provided that
the company complies with the procedures laid down in its constitution and
the CA 2016 (and other related laws in the case of public listed companies). In
order to proceed, the company needs to meet the solvency test to ensure that
the company is able to pay its debt as they fall due.
 In general, financial assistance is not allowed under the CA 2016 provided it

falls within exception under Section 125 (general exception) and Section 126 of
CA 2016.
Financial assistance Share buy-back

Loan capital Share capital
Ordinary shares Variation
Preference shares
Aiman Nariman, & Effendy Othman. (2018). Malaysia company law: Principles
and practices. Netherlands: Wolters Kluwer.
Collins Dictionary of Law. (2006).
O'Sullivan, A., & Sheffrin, S.M. (2003). Economics: Principles in action. Needham,
Mass.: Prentice Hall.

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Topic  Share Capital

Copyright © Open University Malaysia (OUM)

8.1 SHARE CAPITAL AND LOAN CAPITAL

Table 8.1: Differences between Share Capital and Loan Capital

Share Capital Loan Capital

8.2.1 Definition and the Legal Characteristics of a

Section 69 provides that shares in a company may be issued in different classes,

Copyright © Open University Malaysia (OUM)

8.2.2 Why are Shares Issued with Different Rights?

(b) To distinguish the period of involvement in a company. For example,

(c) To cater to different capital needs (from an investorÊs perspective, it is to

8.2.3 Where are the Rights Stated?

Copyright © Open University Malaysia (OUM)

According to Section 90 of CA 2016, a company that has different classes of shares

8.2.4 Voting Rights, Entitlement to Dividends and

(a) Voting Rights

(b) Entitlement to Dividends

Preferential dividends can be divided into cumulative and non-cumulative

(c) Priority in Relation to Payment of Dividends

8.2.5 Typical Rights Upon Winding Up

(a) Priority in Repayment of Capital upon Winding Up

Copyright © Open University Malaysia (OUM)

(b) Sharing of Surplus Profits and/or Assets upon Winding Up

8.3 TYPES OF SHARES

8.3.1 Ordinary Shares and Preference Shares

A company may issue preference shares subject to the companyÊs constitution.

Copyright © Open University Malaysia (OUM)

Para 7.06 Bursa MalaysiaÊs Listing Requirements

Preference shareholders are entitled to vote on the following:

 Dividend or part of dividend in arrears;

 On a proposal to reduce the companyÊs share capital;

 On a proposal for the disposal of the whole of the companyÊs property,

 On a proposal that affects rights attached to the share;

 On a proposal to wind up the company; and

 During winding up.

8.3.2 Redeemable and Convertible Preference Shares

Copyright © Open University Malaysia (OUM)

8.3.3 Issuance and Allotment of Shares

Types of Share Issues

 Initial public offering (IPO)

 Dividend reinvestment plan

Copyright © Open University Malaysia (OUM)

8.3.4 Alteration of Share Capital

8.3.5 Variation of Class Rights

THE TEST OF VARIATION IS WHETHER THE HOLDER OF A CLASS OF

Copyright © Open University Malaysia (OUM)

8.3.6 Procedures of Variation

SELF CHECK 8.1

1. How do you define „shares‰?

2. Explain the different types of shares.

3. Explain what are class rights.

4. Explain the process and procedures of variation of class rights.

Copyright © Open University Malaysia (OUM)

Preferential shareholders in Company A Sdn Bhd are entitled to five per

8.4 CAPITAL MAINTENANCE

8.4.1 Share Buy-back

Copyright © Open University Malaysia (OUM)

In order to determine whether a company is not insolvent at the time of the

„A company is deemed to be solvent if it is able to continue to meet its debts as

Copyright © Open University Malaysia (OUM)

According to Paragraph 12.11 of BMLR, a company may use borrowings as a

According to Section 114, a director who has made an insolvency statement

8.4.2 Financial Assistance