SHARES CAPITAL AND

MAINTENANCE
AZAHARI ABDUL AZIZ
LAW DEPARTMENT
UiTM TERENGGANU
MEANING OF SHARE CAPITAL

• A capital which come from shares, when company issues shares, the
companies will obtain the capital contributed by those who subscribe
the shares.
• S.14(3) – “The application for incorporation shall include a statement
by every person who desire to form a company.....the details of class
and number of shares to be taken by a member.”
TYPE OF SHARE CAPITAL

• Authorized capital
• Issued capital
• Paid-up capital
• Called-up capital
• Unpaid capital
MAINTENANCE OF SHARE CAPITAL

• Creditors - important for creditors because it constitutes the source of fund from which the
creditor’s claim can be met.

• Shareholders - upon winding up, members are entitled to return of capital after all debts have
been paid.

Trevor v Whitworh (1887) 12 Apps cas 409

Paid up capital may be diminished or lost in the course of the company’s trading; that is the result
which no legislation can prevent but persons who deal with, and give credit to a limited company,
naturally rely upon the fact that the company is trading with a certain amount of capital already
paid, as well as upon the responsibility of its members for the capital remaining at call; and they are
entitled to assume that no part of the capital which has been paid into the coffers of the company
has been paid out, except in the legitimate course of its business (pg 423-423, as per Lord Watson).
PROHIBITION ON COMPANY PURCHASING ITS OWN
SHARES
• The prohibition on a company purchasing its own shares was first expressed in
the case of Trevor v Whitworth.
The executor of Whitworth, a deceased shareholder of the company (James
Schafield & Son Ltd), sold his shares in the company to it. Payment is to be made by
two installments. Prior to the payment of second installment, the company went
into liquidation. The executor claimed the balance from the company’s liquidator,
Trevor. The company’s MOA did not authorize the company to purchase its own
shares but the AOA did.
Held: a company had no power to purchase its own shares even if its AOA permits.

• The rule in Trevor v Whitworth has been adopted by S.127.

• 3 conditions: the company is solvent at the date of the purchase, the purchase is
made at the stock exchange and made in good faith and the best interest of the
company – S.127(2).
Why Do Companies Buy Back Their Shares?

• Usually, a company buy back its shares because it has an excess of

capital that it cannot effectively (or profitably) use in its business.
• Companies that are active in managing their capital position may find
at particular time may find they may have too much equity capital
and not enough debt capital to produce optimum returns for
shareholders.
• As a result, the share values do not reflect the true nature of the
company’s financial standing.
PROHIBITION TO GIVE FINANCIAL ASSISTANCE TO
ANY PERSON TO PURCHASE ITS SHARES – SECTION
123 CA 2016
• Has the same detrimental effect on the company’s financial position
of self-acquisition and can infringe the capital maintenance doctrine.
• To prevent the wastage of capital.
• The company is not prevented from recovering the loss from the
offender as stated in S.123(4).
• S.125: Exceptions To S.123
(a) Lending money by the company is in the ordinary course of its
business.
(b) In accordance to the scheme for the benefit of the employees.
(c) Bona fide in the employment of the company.
What amount to financial assistance?

Belmont Finance v Williams Furniture

(a company making a gift to a person, which is used to acquire shares).
Grosscurth wanted to acquire shares in BF. He controlled a company called Maximum. He sold his
shares in Maximum to BF. The funds he obtained were used to finance the acquisition of BF.
Held: There was a financial assistance by BF to Grosscurth.

Chung Kiaw Bank v Hotel Rasa Sayang

(a company guaranteeing a loan by a third party to a person to acquire shares in the company).
Plaintiff gave loan to a company named Syarikat Johor Tenggara. The company used the fund to
purchase shares in Defendant. The loan was secured by Defendant, by creating a charge over its
property and assets. When the company defaulted in payment, Plaintiff wanted to enforce the
security.
Held: There was a financial assistance. However, Plaintiff could not enforce the security because
before 1992 amendment, Section 67(6) did not allow any person other than the company to recover
loan or any amount given in contravention of that section.
EH Dey Pty Ltd v Dey
(reducing liability of a person in connection with the acquisition of the company’s shares).
Dey was a shareholder of Eh Dey Pty Ltd. He owed a sum of money to the company for the shares he had taken
but not fully paid. Mr. and Mrs Paul wanted to buy these shares. Plaintiff passed a resolution reducing the
amount owed by Defendant to the company. Mr. and Mrs Paul then acquired shares at a lower price.
Held: This was financial assistance because the reduction of the amount owed was in connection with the
share transfer between Defendant and Mr. & Mrs Paul.

Lori (M) Sdn Bhd v Arab Malaysia.

MARA offered to sell its shares in Lori to Technivest. Technivest obtained loan from bank, security was several
guarantees and a charge over land belonging to Lori. 3 months later, bank obtained confirmation from
Technivest that the shares which Technivest purchased had been transferred and fully paid up prior to the
giving of loan and the creation of security. Technivest defaulted payment and the bank applied to court to
enforce the security.
Held: The transaction did not amount to financial assistance as this was a bona fide commercial transaction.
Bank had been given undertaking that transfer of shares was concluded when they gave loan and obtained
security.
PROHIBITION ON COMPANIES PAYING DIVIDEND
OUT OF CAPITAL
• S.131(1) expressly stated that dividends must be declared only out of
profits if the company is SOLVENT.
• Therefore, directors of company cannot declare dividends out of capital.
This provision is designed to prevent a reduction of capital being disbursed
as payment of dividends out of a company’s issued capital.
• There is no necessity for there to be available profits when the dividend is
actually paid; what is more important is that there were available profits
when the dividend was declared - Marra Development Ltd v BW Rofe
(1977) 3 ACLR 185
• Source of profits must derive from the company itself which declares and
pays dividend – Industrial Equity Ltd v Blackburn - profits belonging to the
subsidiary cannot be applied to pay dividend of its holding company
because it is a natural consequences of doctrine of separate legal entity.
• Dividends must not be declared in anticipation of earnings – Re Given
Estate.
• A company which has lost part of its capital can lawfully declare or pay
dividends without first making good the capital which has been lost –
Verner v General and Commercial Investment Trust.
• A company is at liberty to pay dividend even if the available profit at the
time of declaring the dividend is not equivalent to its nominal or share
capital, unless the articles say otherwise - Lee v Neuchatel Asphalte.
• Profits available for dividend mean the profits which the directors consider
should be distributed after making provision for past losses, for reserves or
for other purposes.
PROHIBITION TO REDUCE THE SHARE CAPITAL-
SECTION 115
• Generally, company is not allowed to reduce its share capital except in
accordance with the CA 2016
• The rationale behind this is that reduction of capital is treated as
return of assets to the shareholders and the effect would be to
reduce assets that are available for distribution to creditors should
the company goes into liquidation.
• The provision in relation to reduction of share capital is mentioned in
S.115 where company may reduce its share capital in 2 ways.
Merchant Credit Pty Ltd v Industrial & Commercial Realty Co Ltd
MC was set up as a joint venture between Industrial Commercial Bank (ICB) and
Arthur Lipper International Ltd (ALI). It was agreed that ICB and ALI would take
47.5% of MC’s share capital each. MC proposed to develop an ice-skating complex
and the costs of the project was over $1million. ICB agreed to subscribe 332, 500
shares which were taken up by ICR, a wholly-owned subsidiary of ICB. Payment was
made to MC, the balance to fund for the project was advanced by ALI. Issue of
shares was deferred until the project got approval.
The project was abandoned because the planning permission could not be
obtained. ICR then commenced proceeding claiming the return of 332, 500
together with interest.
Held: ICR were not entitled to have their money back as the money was paid for
shares and not as loan. MC have no power to return the money without reduction
of capital which could only be affected by leave of court.
Ways To Reduce Share Capital

S.115. Court sanctions procedure

• 2 conditions to satisfy:
(a) Special resolution approving the reduction; and
(b) Court must confirm the reduction.
• S.117 Solvency Statement

• Private and public company may undertake this exercise without

resorting to court sanction process.
• Only need to provide a solvency statement as required under this
section.
THANK YOU