CAPITAL REDUCTION

• Capital reduction is the process of decreasing a

company's share capital or equity through share
cancellation and return of cash to shareholders (share
buy back).

• The reduction of capital is done by companies for

numerous reasons, including:

• to ensure that the share capital reflects the real value and
financial position of the company.

• Any reduction or return of capital must comply with

statutory procedures i.e. Companies Act 2016 and the
company constitution
Share Capital Illustrated

Other classification include Unpaid share capital, subscribed share capital,

reserve capital
Share Capital Illustrated
• Other classifications include:

• Issued Capital:
• Subscribed Capital:
• Unpaid share capital
• Called up Capital:
• Uncalled up Capital:
• Unissued Capital:
• Paid up Capital:
• Reserve Capital
• Subscribed share capital
• Reserve capital
Reasons for capital reduction
• s.116(1) (a)
Extinguish liability of unpaid share capital

This occurs where the company has sufficient capital and

business is very good and no need for unpaid or
outstanding shares to be called.

Issued Share capital RM2 000 000

Paid up RM1 500 000
Unpaid capital RM 500 000
 Reasons for capital reduction
• By court s.116(1) (b)
Cancellation of paid up capital which is lost or
unrepresented by asset.
When company make loss and leads to negative
balance sheet.

Authorised Share capital RM2 000 000

Financial Statement RM1 000 000
Paid up RM1 500 000
This is to give a more accurate financial position of the
company and its equity
Reasons for capital reduction
• By court s.116(1) (c)
Return to shareholder any paid up share capital not
needed by the company i.e. Surplus

Authorised Share capital RM2 000 000

Financial Statement RM2 500 000
Surplus RM 500 000

Surplus can be used to return funds partly or fully to

shareholders.
Reasons for capital reduction
• a and b are used to reposition the share capital to
reflect the financial statement of the companies
assets and liabilities.

• No return of capital to the shareholders except in

the c situation.
 Procedure for Capital Reduction
• Prior to the coming into force of the Companies Act
2016 (“CA 2016’), all capital reductions must be carried
out by way of a special resolution and court
sanctioned Procedure i.e. S. 64 CA 1965.

Combination of resolution and court procedure

 Procedure for Capital Reduction
• CA 2016 provides two alternative methods for
reduction of capital. S.116 or S117

• Court Sanctioned procedure still provided in s. 116 of CA

2016.
• Solvency test procedure provided as an alternative under s.
117 CA 2016

s.115 CA 2016: “Unless otherwise provided by the constitution”

which may prohibit reduction of share capital
 Capital Reduction by Court
S. 115(a) CA 2016

• Proposal by BOD requires shareholders’ approval by

way of Special Resolution. S 116

• Obtain court confirmation. Decision will be confirmed

where the court views the reduction as:

• fair and reasonable to the shareholders: MEETING

• Does not prejudice the interest of creditors and ability to

pay Creditors as at when due: CREDITORS’ ENQUIRY &
CONSENT. s.116(2)
 Solvency test procedure
S. 115(b) CA 2016

• For private and public companies, reduction of capital

may be done by making a solvency statement. S. 117
and special resolution of members.

• Solvency statement to be made and signed by all

directors in accordance with s. 112 & 113.

• Private company – 14 days before the resolution

• Public company - 21 days before the resolution
 Solvency test procedure
S. 117 CA 2016

• Shareholders approval is required for reduction

• Written resolution must be sent together with the solvency

statements. S. 117(5)(a)
• Solvency statement must be provided at the General
meeting for inspection by members. S. 117(5)(c) & S.
117(6)(a)

• If resolution passed, notice must be sent to Director

General of Inland Revenue (DGIR) and Registrar within
7 days
 Selective Capital Reduction (SCR)
• It is permitted to perform Selective Capital Reduction

• Cancellation of shares is not required to be done equally

across all classes of shares i.e., pro rata.

• SCR is where the company only cancels some shares

belonging to groups of selected shareholders within
specific class.
Can be used to eliminate minority shareholders
Only certain class of shares will be affected

EXAMPLE:
***Reduction on Ordinary share only
***Reduction of preference shares only
 Selective Capital Reduction
• SCR can be used to convert a subsidiary to wholly owned
subsidiary. Majority shareholder (body corporate) returns
capital to minority shareholders.

• SCR can also enable a Public listed company to become

private company – PRIVATISATION. Return of capital to
shareholders except the majority shareholder.

• Such company must comply with requirement under

Malaysian Code on Take-overs and Mergers 2016, Practice
Note 44

• Example of SCR Khazanah Nasional Bhd in Malaysian Airline

Services Bhd.
 Other methods of Capital Return
These methods are not within the scope of s.116 and
s.117
• Return of capital to preference shareholders other
than variation of shares

• Swap of shares with loan capital by replacing

redeemed shares with debt from the persons whose
shares are redeemed.
 Objection by Creditors

S. 118 CA 2016

Creditors are permitted to challenge the reduction in

court within 6 weeks.

Application for cancellation must be served on the

company and notice to the Registrar
INSPECTION AND LODGMENT
• INSPECTION: The resolution is also required to be
available for inspection by creditors for 6 weeks
after its passage.

EFFECTIVE DATE AND LODGMENENT: If no

objection reduction takes effect after 6 weeks and
must be lodged with the Registrar before 8 weeks.
 Court procedure vs. Solvency Test
18 out of around 20 companies will choose court order
for capital reduction instead of Solvency statement.

Reason:
1. Court order for capital reduction provides certainty of
outcome.

2. Lawyers and the company’s advisers are used to this

process.

3. Solvency statement may attract additional risks of

personal liability on the part of all the directors who
have to sign off on the solvency statement.