SHARE CAPITAL.1ppt

Specially Crafted by | TAQI’UDDIN HAMZAH
 1) MEANING OF
SHARE CAPITAL
 What will you learn
under this topic?  2) MAINTENANCE OF
SHARE CAPITAL DOCTRINE
 Basically on the need to ensure the


3 ) PROHIBITIONS
company maintain its share capital
in order to protect 2 parties:-
a) Shareholders
 4) CONCLUSION
b) Creditors
2
COMPANY LTD BY SHARES
FINANCED BY
ISSUING AND ALLOTTING OF SHARES TO
SHAREHOLDERS (members of a company).
SHARE CAPITAL ( USUALLY MONEY)

in accounting terms known as (EQUITY) CAPITAL
-Amount invested in the company so that it can carry on its activities.
LAW OF ASSOC. II/Z.Elias

A capital which come from

shares, when companies
issues shares, the
companies will obtain the
capital contributed by
those who subscribe the
shares.
Section 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.
4
1. Authorised Capital
2. Issued Capital
3. Paid-up Capital
4. Called Capital
5. Unpaid Capital

 ISSUED CAPITAL
 AUTHORISED CAPITAL  PAID-UP CAPITAL
 500,000 SHARES
1,000,000 TO BE ISSUED TO
 A & B PAID HALF
FROM THE
SHARES OF 2 MEMBERS
ISSUED= 250,000
RM1 EACH EQUALLY (A & B)
SHARES
 CALLED-UP  UNPAID CAPITAL

 THE CO DEMANDED A  HOWEVER, THE MEMBERS
& B TO PAY FOR THE ONLY PAID 10% OF THE
REMAINING BALANCE CALLED UP CAPITAL I.E.
OF UNPAID CAPITAL 25,000 OF RM1 EACH
6
 CREDITORS
 IMPORTANT FOR CREDITORS
BECAUSE IT CONSTITUTE 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.
7
A COMPANY IS
PROHIBITED FROM
REDUCING ITS
ISSUED SHARE
CAPITAL
“The CREDITOR has no debtor but that impalpable
thing the corporation, which has no property except
the assets of the business. The creditor, therefore, I
may say, gives credit to that capital, gives credit to WHY?
the co on the faith of the representation that the TO PROTECT
capital shall be applied only for the purposes of the CREDITOR’S
business and he has therefore a right to say that AND
the corporation shall keep its capital and not return COMPANY
it to the shareholders…” (per Jessel MR in Re MEMBERS’
Exchange Banking Co. (Flitcroft’s Case) INTEREST.
(1882)21 ChD 519
COMPANY’S MEMBERS ARE ENTITLED TO EXPECT
THAT THE ISSUED CAPITAL BE EMPLOYED BY THE
COMPANY FORE OBJECTS SET OUT IN THE
MEMORANDUM OF ASSOCIATION. LAW OF ASSOC. II/Z.Elias
TREVOR V WHITWORH
(1887) 12 Apps cas 409
LAW OF ASSOC.
II/Z.Elias
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 (PD 423-423, AS PER LORD WATSON
11
1. Underwriting commissions under Section 58

THE COMPANY PAID ANOTHER PERSON TO
SUBSCRIBE ITS SHARES UPON LISTING ON BURSA.
IN RETURN, THE PERSON WILL BE PAID WITH
CERTAIN COMMISSION.
2. Issue of shares at discount under Section 59

ICo. must issue their shares at nominal or par value to
represent the true value of the shares
3. Issue of shares at premium under Section 60

ISSUANCE OF SHARES ABOVE PAR VALUE DUE TO
THE GOOD PERFORMANCE IN THE PREVIOUS
YEARS. VALUE INCREASES
NOMINAL OF PAR VALUE IS ONLY APPLICABLE

AT THE POINT OF ISSUANCE OF SHARES. THE
ACTUAL VALUE OF THE COMPANY WILL VARY
IN ACCORDANCE WITH THE CURRENT
SITUTATION OF THE COMPANY.
THE ISSUED PRICE OF SHARES WILL BE

DETERMINED BY THE CURRENT VALUE OF THE
COMPANY
 PURCHASE ITS OWN SHARES  GIVING FINANCIAL ASSISTANCE

 )
PROHIBITION
S
 PAYING DIVIDEND OUT OF  REDUCING SHARE CAPITAL
CAPITAL
18
Common Law Proposition:
 TREVOR v WHITWORTH (1887)12
App Cas 409
 MOOKAPILLAI & Anor v LIQUIDATOR,
SRI SARINGGIT & ORS (1981)2MLJ 114.
Statutory Provision:
S.67
1) PROHIBITION ON
COMPANY PURCHASING
ITS OWN SHARES
A COMPANY MAY NOT BUY BACK ITS

OWN SHARES FROM ITS SHAREHOLDERS
WHY?
 It would mean, shareholders will have
received a return of capital ahead of creditors
before winding up,
 Controllers of co. may abuse this process to
maintain control.
 Controllers of co. may abuse power as value
of shares not purchased by co. may be
lessened or increased depending on whether
the consideration paid by the co was greater
or less than their real value.
 The prohibition on a company purchasing its own

shares was first expressed in the case of Trevor v
Whitworth
In this case, 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. The court held that 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 Section 127 of CA 2016.
 3 conditions: the company is solvent at the date
of the purchase, the purchase is made at the stock
exchange & made in good faith and the best
interest of the company – 127 (2) CA 2016
 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 at particular time may find they 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.
27
28
 Flitcroft’s case..
Purchase by a company of its own shares, even though authorised by its
articles and sanctioned by the GM of members is VOID
 Trevor v Whitworth (AoA, not MoA authorised co’s
purchase of its own share.)
 Mookapillai & Anor v Liquidator,

Sri Saringgit & Ors.
(agreement between majority and the minority for the co. to buy back minority
shareholder’s shares)

30
1997 SEC 67A OF CA 1965

Allow public company to buy back its shares &
to give financial assistance for shares buy back.
1998
SECTION 67A WAS AMENDED
Only public company can undertake
shares buy back
2016
SECTION 126 CA 2016
Not prohibited but allowed under

this section – solvency statement
31
 SECTION 123(1)
 This section prohibits the company from
GIVING FINANCIAL ASSISTANCE, whether
directly or indirectly either by loan, guarantee,
or security, to any to person to purchase its own
shares.
 SUBSIDIARY CO
 Also, if the company is a
subsidiary, any shares in its
holding company
32
Has the same detrimental effect on the

company’s financial position of self –
acquisition and can infringe the capital  To protect
maintenance doctrine.
the
creditors
To prevent the wastage of capital.
The company is not prevented from

recovering the loss from the offender as
stated in Section 123(4) CA 2016.
33
Exceptions to sec 123:

 Section 125
 Lending money by the company is in the ordinary
course of its business
 In accordance to the scheme for the benefit of the
employees
 Bona fide in the employment of the company
“Financial Assistance” for
acquisition of shares means,
either:
-giving loans
-giving guarantee
-provision of security,
-release of an obligation,
-release of a debt.
“Purchase” means when a person

obtains a transfer of shares from a
shareholder in consideration of
some form of payment

 Belmont Finance v Williams Furniture (a company

making a gift to a person, which is used to acquire
shares)
 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)
 EH Dey Pty Ltd v Dey (reducing liability of a person in
connection with the acquisition of the company’s shares)
37
• 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.
38
• Plf gave loan to a company named Syarikat Johor Tenggara.

The company used the fund to purchase shares in Defendant.
The loan was secured by D, by creating a charge over its
property and assets.
• When the company defaulted in payment, P wanted to
enforce the security.
• Held: There was a financial assistance. However, P 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.
39
 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.
 P passed a resolution reducing the amount owed by D 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
D and Mr. & Mrs Paul.
40
• MARA offered to sell its shares in Lori to Technivest (T). T

obtained loan from bank, security was several guarantees
and a charge over land belonging to Lori.
• 3 months later, bank obtained confirmation from T that the
shares which T purchased had been transferred and fully
paid up prior to the giving of loan and the creation of
security.
• T 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.
41
 SURE lent money to Woodstock, who lent

money to Craddock, who paid money to
Contalgo (a merchant bank) that made a
successful bid for shares in SURE .
 Co’s assets used to finance the creation of the
consideration for the transfer of shares in co.
Kidurong Land Sdn Bhd. V Lim Gaik Hua
[1990]1 MMLJ 485
 Assistance provided to the vendor of the shares

may also constitute a breach of the prohibition.
Armour Hick Northern Ltd v Armour Trust
Ltd.[1980]3 AllER 833

Consequences of contravention of s
123(1) or (2)
•By s 123(3) officer commits offence-liable to a fine not
exceeding 3 million ringgit or max imprisonment 5 years or
both
•By s 123(4) upon conviction under 123(3) can incur
personal liability (similar to s 67(4) of CA 1965)

•By 123(5) company can recover the loan etc made in
contravention
New provision on giving of financial assistance

by unlisted companies for acquisition of shares -
S 126 CA 2016
–Unlisted Company may by special resolution
give financial assistance for acquisition of its

shares or its holding company’s shares, or for the
purpose of reducing or discharging a liability
incurred for such an acquisition
- Conditions to be satisfied:
 1.Company must be a non-listed one
 2.The company must pass a special resolution
 3.The directors must resolve, before the financial
assistance is given, that:

–The company may give the assistance
–Such assistance is in the best interest of the company
–Terms and conditions are just and reasonable to the
company
4. Directors who voted in favour must, on the

same day as the board resolution, make a
solvency statement that complies with
provisions in relation to the giving of the
assistance
5. The aggregate amount of the assistance and

any other financial assistance given under the
section that has not been repaid does not exceed
10% of the aggregate amount received by the
company in respect of the issue of shares and the
reserves of the company, as such aggregate
amount is disclosed in the most recent audited
financial statements of the company
6. The company must receive fair value in

connection with the giving of the assistance
7.The assistance must be given not later than 12
months after the day on which the solvency
statement is made by the directors
 A further procedural requirement is that the company

must, within 14 days from the giving of the financial
assistance, send to each member a copy of the solvency
statement and a notice containing certain particulars as
stipulated in s 126(5).(see the sub-section)
 •Consequences of contravention? – See s 126(6). –
Fine up to RM3 million and/or imprisonment not
exceeding five years.
51
 The rule or maintenance of

capital prohibits a company
from returning money to its
members of a company except
in the form of dividends.
 Dividends are the returns
shareholders receive from their
investment in the company.
 If dividends were paid when the
company has no profit, the
value of the company’s assets
would fall below its paid up
capital.
 Under CA 2016 this is governed by sections 131-133.

 –S 131 states that a company may only make a distribution
to shareholders out of profits and if it is solvent.
Contravention will result in the company, every officer,
other person or individual committing an offence. Penalty:
Max imprisonment- 5 years; Max fine RM3 million, or both
 This provision is designed to prevent a reduction of capital
being disbursed as payment of dividends out of a
company’s issued capital
 S 132 requires distribution to be authorised by the

directors. The directors must be satisfied that the
company will be solvent immediately after the
distribution.
 •If after distribution is authorised but before it is made
directors cease to be satisfied of its solvency, they
must take all necessary steps to prevent the
distribution being made.
 Every director or officer who wilfully pays,

permits or authorises the unlawful distribution
is liable on conviction to up to 5 years
imprisonment, or fine of RM3 million or both.
Recovery of distribution – s 133

–Company can recover from shareholder any
distribution improperly/unlawfully made, UNLESS:
•He received it in good faith; and
•Has no knowledge that the company did not satisfy
the solvency test under 132(3)
–Company can recover from director or manager the
excess distribution wilfully paid or permitted to be
paid.- 133(2)
–Such director or manager can seek contribution

from others who may also be liable, if the
company had recovered the whole amount from
him alone.
–Liability under this section does not extend to
estate of deceased
THE RULES FOR DIVIDEND:

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
 Co. under obligation to pay as long as profits are

available at the time of declaration.
Marra Development Ltd v BW Rofe Pty Ltd
(1977) 3 ACLR 185.
Appellant co. had declared dividends. Between the
time of declaration and the time of payment the
company’s assets were revalued, causing book
value of co’s assets to depreciate. As such it
showed that there were no profits available then.
Court held: profits need only be available at
the time of declaration. It was not necessary for
the profits to be shown at the time of payment.
 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
63
 Generally, company is not allowed to reduce its share

capital except in accordance with the Companies Act
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 Section 115 where company may reduce its
share capital in 2 ways.
Reduction of capital with confirmation by court is

quite similar to the existing situation under s 64 CA
1965
•Reduction of capital by special resolution and
solvency statement under s 117 CA 2016 is entirely

new.
•The solvency statement for a reduction of capital
must be by ALL the directors- see S 113(2)CA 2016

 It is an offence for a director to make a

solvency statement without reasonable grounds
for his opinion. On conviction he could be
fined a maximum of RM500,000 or imprisoned
up to 5 years or both. See s 114 CA 2016.
 SOLVENCY
 COURT SANCTIONS
PROCEDURE -
STATEMENT
 Sec 117 CA 2017
 Sec 115 CA 2016.  Private and public
 2 conditions to satisfy: company may undertake
 Special resolution this exercise without
approving the resorting to court
reduction; and sanction process.
 Court must  Only need to provide a
confirm the solvency statement as
reduction required under this
section
67

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Specially Crafted by | TAQI’UDDIN HAMZAH

 Basically on the need to ensure the

SHARE CAPITAL ( USUALLY MONEY)

-Amount invested in the company so that it can carry on its activities.

LAW OF ASSOC. II/Z.Elias

A capital which come from

The application for

LAW OF ASSOC. II/Z.Elias

 CALLED-UP  UNPAID CAPITAL

PAID UP CAPITAL MAY BE DIMINISHED OR LOST IN

1. Underwriting commissions under Section 58

2. Issue of shares at discount under Section 59

3. Issue of shares at premium under Section 60

NOMINAL OF PAR VALUE IS ONLY APPLICABLE

THE ISSUED PRICE OF SHARES WILL BE

 PURCHASE ITS OWN SHARES  GIVING FINANCIAL ASSISTANCE

A COMPANY MAY NOT BUY BACK ITS

 The prohibition on a company purchasing its own

In this case, the executor of Whitworth, a deceased

 The rule in Trevor v Whitworth has been

 Usually, a company buy back its shares because it

 Mookapillai & Anor v Liquidator,

LAW OF ASSOC. II/Z.Elias

1997 SEC 67A OF CA 1965

Not prohibited but allowed under

Has the same detrimental effect on the

To prevent the wastage of capital.

The company is not prevented from

Exceptions to sec 123:

“Purchase” means when a person

LAW OF ASSOC. II/Z.Elias

 Belmont Finance v Williams Furniture (a company

• Grosscurth wanted to acquire shares in BF.

• Plf gave loan to a company named Syarikat Johor Tenggara.

 Dey was a shareholder of Eh Dey Pty Ltd. He owed a sum of

• MARA offered to sell its shares in Lori to Technivest (T). T

 SURE lent money to Woodstock, who lent

 Assistance provided to the vendor of the shares

LAW OF ASSOC. II/Z.Elias

personal liability (similar to s 67(4) of CA 1965)

New provision on giving of financial assistance

give financial assistance for acquisition of its

 2.The company must pass a special resolution

 3.The directors must resolve, before the financial

assistance is given, that:

4. Directors who voted in favour must, on the

5. The aggregate amount of the assistance and

6. The company must receive fair value in

 A further procedural requirement is that the company

 The rule or maintenance of

 Under CA 2016 this is governed by sections 131-133.

 S 132 requires distribution to be authorised by the

 Every director or officer who wilfully pays,

Recovery of distribution – s 133

–Such director or manager can seek contribution

THE RULES FOR DIVIDEND:

 Co. under obligation to pay as long as profits are