TOPIC 2:

SHARE
CAPITAL & ITS
MAINTENANCE

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  PAID UP CAPITAL MAY BE DIMINISHED (berkurngan) 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

TREVOR V UPON THE FACT THAT THE COMPANY IS TRADING WITH

A CERTAIN AMOUNT OF CAPITAL ALREADY PAID, AS

WHITWORH (1887) WELL AS UPON THE RESPONSIBILITY OF ITS MEMBERS

FOR THE CAPITAL REMAINING AT CALL; AND THEY ARE

12 APPS CAS 409

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)
-MEAN THE MONEY IS THERE STILL AVAILABLE TO PAY THE
CREDITOR

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 PROVISIONS UNDERWRITING COMMISSIONS UNDER SECTION 58

WHICH PREVENT THE COMPANY PAID ANOTHER PERSON TO

SUBSCRIBE ITS SHARES UPON LISTING ON

WASTE OF
BURSA. IN RETURN, THE PERSON WILL BE PAID
WITH CERTAIN COMMISSION.

SHARE CAPITAL ISSUE OF SHARES AT DISCOUNT UNDER SECTION 59

UNDER THE
ISSUE SHARES BELOW PAR VALUE I.E. 0.50
SEN.

COMPANIES ACT
1965
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.

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  THE COMPANIES ACT 2016 MODIFIED THE
CAPITAL MAINTENANCE DOCTRINE AND
PERMITS A COMPANY TO REORGANISED ITS
CAPITAL, PROVIDED THAT THE COMPANY IS

SOLVENCY TEST SOLVENT AND WILL NOT BECOME INSOLVENT.

AND STAEMENT  SEC 112: SOLVENCY TEST

 SEC 113 : SOLVENCY STATEMENT

UNDER SEC 112 &  CONTRAVENTION SEC 114: A DIRECTOR WHO

113
MAKES THE SOLVENCY STATEMENT WITHOUT
HAVING REASONABLE GROUND FOR THE
OPINIONS COMMITS A CRIMINAL OFFENCE
AND MAY BE LIABLE UPON CONVICTION OF
IMPRISONMENT NOT EXCEEDING 5 YEARS OR
FINE NOT EXCEEDING RM500,000 OR BOTH.

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A statement made by EACH director-they have formed an opinion- the company satisfies the SOLVENCY TEST in
relation to the transaction

the opinion of the directors' must: (i) be based on the INQUIRY of the directors into the co state of affairs and prospects;
and (ii) take into account co liabilites-ALL - including contingent liabilities

note _for directors:

for:-REDUCTION OF CAPITAL & REDEMPTION OF REDEEMABLE PREFERENCE SHARES- ALL DIRECTORS

SHARE BUYBACK AND GIVING FINANCIAL ASSISTANCE- MAJORITY OF DIRECTORS

how to make the SOLVENCY STATEMENT?

Sec 113(1)

determined by Registrar, signed by each director making it with the director's name and dated

and the declaration to be attached

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SOLVENCY TEST?

SEE sec112

in 4 situations

1. redemption of redeemable preference shares

2. share buyback

3. reduction of capital

4. giving financial assistance

the solvency test- operates on the basis- company must ensure-it has SUFFICIENT FUNDS -to pay debts to creditors
pls take note- the distribution of profits by way of dividends- not subject to 112 & 113
BUT-Section 131- contains a solvency test b4 company distributes profit

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Section 112(1) of CA 2016: For the purposes of provisions relating to redemption of preference
shares, reduction of share capital and financial assistance, a company satisfies the solvency test in
relation to a transaction if:

(a) Immediately after the transaction there will be no ground on which the company could be found
to be unable to pay its debt;
(b) Either-
(i) it is intended to commence the winding up of the company within 12 months after the date of
transaction, the company will be able to pay its debts in full within 12 months after
the commencement of the winding up; or
(ii) in any other case, the company will be able to pay its debts as the debts become due during the
period of 12 months immediately following the date of the transaction
(c) the asset of the company is more than the liability of the company at the date of the transaction

Under Section 112, a company shall be deemed to be solvent if it satisfies the solvency test. So it can be defined as a
test for a company to satisfy for it to be solvent. The tests can be seen in subection (1) & (2) of Section 112 of CA
2016.

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 112 (1) - 1. the company have the ability to pay its debt, (2) if the company intend to wind up
its business within 12 months after the date of transaction, the company able to pay its debt
in full within 12 months after the date of winding up or/ the company able to pay its debt
during the period of twelve months immediately following the date of the transaction (3) the
assest of the company is more than the its liability at the date of transaction
what are the contents, who prepare, what kind of transaction

A solvency statement
in relation to a transaction is a statement that each director making the statement has formed the opinion that
the company satisfies the
solvency test in relation
to the transaction.

Sec 113/114

The solvency statement is a statement made by each director that they have formed an opinion that the company satisfied the solvency test in relation to the transaction.

The directors’ opinion must be (1) based on the directors’ inquiry into the company’s state of affairs and prospects; and (2) must take into account all of the company’s
liabilities including contingent liabilities.

the conditions are all in section 113

the sanction-section 114

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What is meant by the capital maintenance rule? What is the purpose of the rule?

Capital maintenance rules can be seen as a device aimed at protecting creditors from shareholder
misconduct and post contractual opportunistic behaviour in relation to a company’s capital. The aim in
applying this doctrine was to protect creditors from the risk that shareholders, after having placed
funds into the company, would subsequently withdraw their capital investment as soon as the company
had any financial difficulties.

The purpose of the capital maintenance rule is to ensure that the company, once it borrows money, the
company is able to pay back the creditor by monthly installment.

Capital maintenance rules exist so that the capital of a

company is preserved for the purpose of paying its creditors in the event of a
winding-up procedure. This is to protect the interest of company, its members
and creditors. As can be seen in the case of Trevor v Whitworh, where paid up
capital may be diminished or lost in the course of the company’s trading.

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To ensure that all shareholders entitled to return of capital after all debts have been paid.

it protect the company members, the creditors and the company interest

so does CA 16 follow capital maintenance rule in total?? the rule derived from trevor's case

Why does this rule exists??

• to protect the company members and the creditors?

• to protect the interests of creditors of a company

CA16 modified the capital maintenance rule and permits a company to reorganize its
capital, provided that the co is SOLVENT and will not become INSOLVENT

eg - b4 this, co cannot give financial assistance. now under CA16, a co is allowed to

provide financial assistance subject to shareholders approval and the issuance of a
solvency statement. there are exceptions
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PENALTY?
Sec 114

CRIMINAL OFFENCE -if the director made the solvency statement without having reasonable grounds
on conviction, may be liable to imprisonment not more than 5 years or fine not more than rm500,000 or both
take note-it may also lead to disqualification of director (section 198)

so 4 prohibitions under CA16

1. co cannot buy own shares

•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

so general rule-cannot unless the conditions above are satisfied

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 3) PROHIBITIONS
SECTION 127 SECTION 123 SECTION 131 SECTION 115

GIVING FINANCIAL PAYING DIVIDEND OUT

REDUCING SHARE
PURCHASE ITS OWN
ASSISTANCE OF CAPITAL CAPITAL
SHARES
CONDITIONS: Conditions:
Conditions 2 ways to reduce:
a) Company is solvent a) Subscription or
purchase of shares a) Profit a) Court sanctions
b) Purchase at stock b) There is financial
exchange b) Solvency b) Solvency statement
assistance
c) Good faith for the best c) FA is for the purpose of
interest of co purchasing shares

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 1) 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.

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

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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
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 Usually, a company buy back its shares
because it has an excess of capital that
it cannot effectively (or profitably) use in

WHY DO
its business.
Companies that are active in managing

COMPANIES BUY their capital position may find at

BACK THEIR
particular time may find they may have
too much equity capital and not enough

SHARES? 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.
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PROHIBITION AGAINST SHARE BUY BACK:-
1. may allow the co management the opportunity to manipulate the share price

2. may allow for unfair treatment between members, where some members are given the
opportunity to sell their shares to the co on more advantageous terms3. result in a depletion of
capital: detrimental to creditors

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 PROCEDURE
• RESOLUTION TO BUY BACK
• MAKE SOLVENCY STATEMENT UNDER SEC 112
BOD

• CO ANNOUNCE TO BURSA ABOUT THE SHARE BUY BACK

• DRAFT CIRCULAR TO BE SENT TO ALL SHAREHOLDERS
Bursa

• APPROVAL BY ORDINARY RESOLUTION

• AUTHORISATION VALID FOR CERTAIN PERIOD (CHAPTER 12 OF BURSA LISTING
GM REQUIREMENTS)

• MAKING REQUISITE ANNOUCEMENT OF MEETING’S OUTCOME

BURS
A
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 WHAT HAPPEN TO THE SHARES?
the purchased shares will be cancelled; or

It will be referred as a ‘treasury shares’; or

To retain part of the shares so purchased as treasury shares and cancel the remainder
of shares.

The treasury shares will be held a securities account. It can be used as ‘share
dividend’, resell the shares or transfer the shares under the employee’s share scheme.

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2) PROHIBITION TO GIVE
FINANCIAL ASSISTANCE TO ANY
PERSON TO PURCHASE ITS
SHARES – SEC 123 CA 2016

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