Reduction of Share Capital

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company law in malaysia

Text of Reduction of Share Capital

Reduction of Share Capital

Generally a company is prohibited from reducing its share capital.Effect: reduce the assets that are available for the creditors if companies goes into liquidation.Reduction of Share CapitalA company may reduce its shares by:Extinguish or reduce the liability on any of its shares in respect of share capital not paid upCancel any paid up capital which is lost or unpresented by available assets;Pay off any paid up share capital which is in excess of the needs of the company.

Exception Sec 64Where company issued partly paid shares, later the company no longer needed the uncalled amount;May carry out a reduction of capital by cancelling the amount that is no longer required.Extinguish or reduce the liability on any of its shares in respect of share capital not paid upA company may lose money during its trading & the amount shown as paid up capital in a cos financial statement may no longer reflect the value of assets.Co may wish to cancel some of its capital so that the balance sheet would gives more accurate view of the companys financial position.Cancel any paid up capital which is lost or unpresented by available assetsRe Fowlers Vacola Manufacturing Co LtdCo sold a substantial part of its business operations which resulted in excess capital to members.Pay off any paid up share capital which is in excess of the needs of the companyAuthorization from the articles Table Article 42A special resolution in general meeting andConfirmation by the court (High court + by way of petition)Procedure for reduction sec 64 (1)Sec 64 (2) (a) creditors entitled to object;

Sec 64 (2) (c) (i) & (ii) payment of creditors debtCreditors rights sec 64 (2)The consent of the creditors who are entitled to object has been obtained or

Their debts and claims have been discharged determined or securedsec 64 (4)Court may order reduction if:Merchant Credit Pte Ltd v Industrial & Commercial Realty Co. Ltd (1983)

A company limited by shares cannot return the capital to the shareholders.

the appellant company could not convert or agree to convert their equity capital into a loan, conditionally or unconditionally and repay the loan without reduction in capital which no company could effect without the leave of the court;the appellant company had no power to rescind the contract for shares and to return the application moneys as moneys borrowed or as moneys had and received because an illegal reduction of capital would thereby be involved;

CaseSec 62 (1) (e), (2) cancellation of shares not a reductionSec 61 redemption of redeemable preference sharesSec 60 (3) (e) & (f) application of share premium accountSec 181 (2) (c) court orderOther reduction permittedPaying off preference shareholders depends on whether the class rights would have been affected upon winding up.

If what is proposed (reduction) is in accordance with the class rights upon winding up; there is no variation.Is reduction variation?F: General meeting passed a special resolution - paying off the preference share capital. Preference shareholders; no class meeting & court could not confirm.

HOL: The preference shareholders had a right to a return of capital in priority to other shareholders and that right was not affected.House of Fraser plc v ACGE Investment LtdF: AOA- rights of any class were to be deemed to be varied by the reduction of the capital paid up on those shares. Co proposed paying off its preference shares and cancelling them.

COA: It was a reduction; there should be separate class meeting.

Re Northern Engineering Industries plcA company cannot use the funds or money which it has raised from the shareholders to pay dividendsIllegal return of capital to the shareholdersFraud on the creditors as the company would be less able to pay its debts.DividendsNo dividend shall be payable to the shareholders of any company except out of profits or pursuant to section 60 (sec 60 (3) (c).Art 100 of Table A.Sec 365 (1)Conditional right- depends on the existence of profits- decision is a matter of internal managementRights of a shareholders to dividends If declared debts owed by the company to the shareholders;Cannot be revoked, cancelled or reducedHilton International- D should be paid out of profits- No D; if co. insolvent or jeorpadize cos balance sheetChip Thye Enterprise Pty Ltd- Not justify to declare D when the co is insolventBy cashBy issue of fully paid up shares (bonus shares) sec 60 (premium account)Sec 67A (3B): treasury shares (share dividend)Method of payment of dividendsDeclaration of the dividend by competent authority;Payment2 steps involvedCompany in general meeting, subject to the amount recommended by the directors (Art 98)Industrial Equity Ltd v Blackburn- It is possible for the articles to vest the power to declare dividends in the directors.Who may declare dividends Marra Development Ltd

- Profits for payment of dividends need to be available at the time the dividends are declared and not necessary available when the dividend is actually paidAvailable of profitsProfits belonging to a subsidiary could not be applied for the payment of its holdingIndustrial Equity Ltd v BlackburnSec 365 (2) (a)Every director or manager who permitted the payment of such dividend would be guilty;Sec 365 (2) (b)Directors maybe personally liable to compensate the creditors.Effect of ContraventionArticle 99Its declaration does not create a debt May revoke before payment.Interim Dividends