DPA30083: COMPANY

LAW
TOPIC 3: CORPORATE
EQUITY
Ms. Amirah Zawani Binti Wakhi Anuar
 LEARNING OUTCOME
At the end of this chapter, students should be able to:
✘ Define shares and dividends
✘ Discuss ordinary shares and preference shares
✘ Explain sole debenture and serial debenture
✘ Compare fixed charge and floating charge

CLO 2: Provide explanation on principles of law affecting financial resources, administration and management of a
company in accordance with rules and regulations provided by Companies Act 2016 (C3)

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 Introduction to Equity

✘ Company requires financial resources or capital to establish and

run their business activities.

✘ Capital – Money acquired or acquired by a company to start, run

or expand its business.

✘ Example of capital – Share Capital, Retained earnings.

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 Share Capital
✘ Share Capital is the amount of capital raised through the
issuing of shares by a company for the purpose of collecting
funds to run the company.

✘ Company can invite public to buy shares, known as public

issue.

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 Classification of Share Capital

1. Authorized Capital 3. Paid-up Capital

4. Unpaid or Uncalled
2. Issued Capital
Capital

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 ✘ The max amount of share capital that
a company is authorized by its
constitution to issue to shareholders.
✘ A company could not issue shares in
1. Authorised Capital excess of its authorized capital.
✘ If the aggregate of the existing shares
and proposed new shares exceed the
company’s authorised capital, the
company would have to increased its
authorized capital

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 1. Authorised Capital
✘ No par value (NPV) under the Companies Act 2016:

✗ With effect from 31st Jan 2017 all companies with share capital migrated to a no par value
regime.

✗ Section 74 Companies Act 2016 – all shares issued before or upon the commencement of
this Act shall have no par or nominal value

✗ NPV rule replaces rule under Companies Act 1965 which requires a company to determine
the par value or nominal value of its shares.

✗ It eliminates the need for a new incorporated company to state authorized share capital or
nominal value of its shares.
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 2. Issued Capital
✘ It was the nominal value of share capital actually issued to the shareholders.

✘ Issued share capital is part of the company’s authorized capital, which is the
maximum amount of capital a company can issue under its constitution.

✘ Private companies – issue shares to members, staff, families.

✘ Public companies – issue shares to general public.

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 2. Issued Capital

Assuming that M&R Industries Sdn. Bhd.’s authorised capital

was RM1,000,000 divided into 1,000,000 shares of RM1 each,
the par value of each of the company’s shares was RM1.
If the company had issued 200,000 shares, its issued capital was
RM200,000 (200,000 x RM1 par value)

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 3. Paid-up Capital
✘ Paid-up Capital is the amount of money a company has received from
its shareholders in exchange for shares sold to them.

✘ If the members have fully paid-up the shares, the shares are known as
fully paid-up capital.

✘ Company may use the funds injected into a company to buy assets for
renovation or as a working capital.

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 3. Paid-up Capital

Ali and Ben are two shareholders of M&R Industries Sdn Bhd.
Ali holds 20,000 shares and has fully paid-up only RM10,000
on his shares.
Ben has fully paid-up capital 100,000 of his shares
(RM100,000).
Hence, the paid-up capital of M&R Industries is RM110,000.

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 4. Unpaid Capital
✘ It was the amount unpaid on shares issued which would be called up
upon at any time.

✘ It was a debt due to the company which was legally enforceable.

✘ Section 214 (1) (d) - The directors might demand the holders of the
shares which are not fully paid-up capital to pay up on the unpaid shares,
thus, the said sum was available to meet the company’s future needs.

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 What is shares??
✘ Section 2 of the Companies Act 2016 defines shares as “issued share capital of a
corporation and includes stock, except where a distinction between stock and shares
is expressed or implied.”

✘ Units of ownership interest in a corporation or financial asset.

✘ It entitles its holder (the shareholder) to an equal claim on the company's profits,
if any are declared, in the form of dividends.

✘ It also entitles equal obligation for the company's debts and losses.
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 Shares
Section 69 – subject to the company’s constitution provides that shares in

a company may:

a) Be issued in different classes of shares

b) Be redeemable in accordance with Section 72

c) Confer preferential rights to distribution of income

d) Confer special, limited or conditional voting rights

e) Not confer voting rights

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 Classes
of
Shares

1. Ordinary 2. Preference
shares shares

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 1. Ordinary Shares
✘ Ordinary shares or equity shares is defined in section 2(1) as “any shares
which is not a preference shares”

✘ In the CA 2016, “equity share” is used to represent “ordinary shares”.

✘ Ordinary shares are shares that are not preferred and do not have any
predetermined dividend amount.

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 1. Ordinary Shares
✘ Section 71 (1)- the rights of an ordinary shareholder can be described as:

Right to attend, participate and speak at a meeting

Right to vote by show of hand on any resolutions of the company

Right to one vote for each share on a poll on any resolutions of the company

Right to equal share in the distribution of surplus asset of the company

Right to equal share in dividends authorized by the Board

Right to be repaid their capital during winding up

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 1. Ordinary Shares
✘ Section 71(2) - provides that the right to an equal share in dividends
may be modified by the company’s constitution or in accordance with
the terms on which the share is issued.

✘ Section 90(2) & (3) – a company may issue ordinary shares which do
not entitle holders to vote at the company’s general meetings. The
phrase “non-voting” should appear on share certificate.

✘ Therefore, a company may even issue different classes of shares.

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 1. Ordinary Shares
In contrast with preference share, ordinary share do not carry with
it the right to:
Fix dividends;
Cumulative dividends;

Further, dividends are only to be paid to the ordinary shareholders

after preference shareholders have been paid.

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 2. Preference Shares
✘ A private company cannot offer to the public any of its shares or allot shares
with a view to offer them to the public.

✘ Conditions are also imposed on a public company before it can offer its
shares to the public.

✘ Sometimes, the shares issued by a company do not enjoy the same benefits.

✘ Some may have certain priority over the others. Shares with priorities and
benefits to them are known as preferences shares.

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 2. Preference Shares

✘ Section 2(1) define preference shares as;

✗ “a share by whatever name called, which does not

entitle the holder to the right to vote on a resolution or to
any right to participate beyond a specified amount in any
distribution whether by way of dividend, or on
redemption, winding up, or otherwise.”

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 2. Preference Shares
✘ The holders of preference shares have rights which are
different from the holders of ordinary shares.

✘ Rights of preference shares holders must be state in the

company’s constitution.

✘ Section 90 (4) provides that a company may not issue

preference shares or convert any issued shares into preference
shares unless certain rights pertaining to those preference
shares have been set out in the company’s constitution.
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 2. Preference Shares
✘ Preference shareholders rights may also be provided for by a separate
contract that is entered between the company and the preference
shareholder or those rights may be stipulated in a resolution.

✘ Preference shares have:

✗ priority of payment of dividends over other shares.
✗ priority of return of capital in the case of a company’s winding up
over other shares.
✗ Fixed rate of dividend

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 2. Preference Shares
✘ Preference share may be cumulative or non-cumulative

✘ Redeemable preference shares are preference shares that can be

redeemed by the company either at a fixed time in the future or at
the option of the company

✘ S72 (4) states that funds for redemption of RPS must be:
✗ Out of profits
✗ Fresh new issue of shares
✗ Capital of the company
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 Differences Between Ordinary Shares & Preference Shares
Characteristics Ordinary Shares Preferences Shares
1. Dividend rates Not fixed. Depends on company’s Fixed
profit
2. Payment Received dividend after company made Having priority to received payment of
payment for PS dividend

3. Rights for vote Full rights to vote Limited right to vote

4. Dividend in arears Ordinary shareholders are not entitled Preference shareholders are entitled to
to dividends in the past years which are receive dividends in arrears.
not paid by the company.

5. Right to control Ordinary shareholders are the owner of Preference shareholders are not the owner
the company the company and have right to control of the company and have no right to
the policy of the company control the policy of the company

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 Dividend
✘ Dividends refer to a distribution of a portion of a company’s
earnings or profit, decided by BOD to a class of its
shareholders.

✘ Taxable payment declared by a company’s BOD and given to

its shareholders out of the company’s current or retained
earnings.

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 Dividend
✘ Represent the interest of shareholders in the company’s assets
which can be value by a sum of money.

✘ Dividends can be issued as cash payments, as shares, specific

assets, debenture or other approval or as per company’s
constitution.

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 Dividend

✘ CA 2016 allows a company to declare dividends subject to

certain conditions:
 S131 (1) – distribution of dividends may only be made out of
profits

 S132 (1) – the distribution to be authorized by directors of the

company

 S132(2) – directors must satisfied that the company will be

solvent immediately after the distribution is made
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 Dividend

✘ Solvency?? Director must consider whether the

company is able to pay its debt as and when they become due
within 12 months immediately after the distribution is made
“solvency test”

✘ The directors need to assess the company’s cash flow and

financial position at the point of distribution, they will also
need to forecast these for a period of 12 months after the
intended distribution date.
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 Types of Dividend
1. Interim Dividend
• declared by director when they
believe with the financial position of
the company.
• It is paid before end of financial year
or before the annual meeting.
• Paid either out of retained earnings
in the P&L or out of profits in which
the dividend is required to be
announced.
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2. Final Dividend
• Refers to dividend which the
company declares after the FS of
fiscal year has been reported in co’s
AGM.
• It is a company’s debt on
shareholders.
• Shareholders can force the company
to paid the dividend.
 Types of Dividend

3. Cumulative Dividend 4. Non-Cumulative Dividend

• Dividends paid on cumulative • Share that does not pay the

preference shares in which the shareholder any dividends that
company is liable for in the next are omitted or unpaid.
payment period.
• They do not have unpaid
• Dividends on cumulative dividends carried over from
preferred shares are an previous year.
obligation regardless of the
earnings of the company.

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 Dividend
✘ A subsidiary company’s profit cannot be used by the holding company
to declare dividends – Industrial Equity Ltd v Blackburn [1977]

✘ Dividends Clawback – Sec 133

Any dividend paid to a shareholder which exceeds the value of any
distribution that could properly have been made can be clawed back by
the Company, unless the shareholder:
has received the distribution in good faith; and
has no knowledge that the company did not satisfy the solvency test.

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 Dividend

✘ Director and Manager beware!

To safeguard the company from financial losses, every director or

manager of a company who wilfully pays or permits payment of the
dividend which he knows is not from profits shall also be liable to
pay back the company the differential sum between amount
distributed and dividend that the company is rightfully able to
distribute.

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 Dividend
✘ Consequence for Wilful Pay-out

In addition, every director or officer of the company who wilfully

and knowing that the company does not satisfy the dividend
distribution criteria yet still allow dividend distribution to be
executed, upon conviction is liable to imprisonment not
exceeding five years or a fine not exceeding RM 3,000,000 or
both.

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 Debentures
✘ Like a natural person, a company may raise finance by borrowing.
✘ S21 CA 2016 grant unlimited capacity to a company to do any act to enter
into any transaction.
✘ Debentures refer to a long term debt instrument which is used by large
companies as well as government to obtain funds.
✘ As roughly view, debenture is a document given by a company as evidence of
a charge created by the company in return for a loan.

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 What is debenture?

Debenture is a written instruments or document acknowledging a debt and

contains provisions with regard to repayment of principal and payment of
interest at fixed rate.

Sec 2 (1), CA 2016.

Debenture includes debenture stock, bonds, sukuk, notes and any other
securities of a corporation whether constituting a charge on the assets of
the corporation or not.
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 Features of Debentures
✘ Debentures-holders are entitled to periodical payment of interest
at an agreed rate.
✘ Entitled to redemption of their capital as per the agreed terms.
✘ No voting rights
✘ Debentures are secured by charge on or mortgage of the assets
of the company
✘ Debenture holders have the right to sue the company for any
unpaid dues.

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 Types of Debentures
Sole Debenture Serial Debenture

• A document that ensure loan which • Issue of a debt securities or debenture

made between bank or financial stocks in which loan is raised usually
institution with company. offer to the public via Bursa Malaysia.

• Also known as single debenture. • Section 158 (4) – co required to issue a

doc acknowledging the debt within two
• The loan usually guaranteed with fixed months after acceptance money from
charge on company’s assets the public.

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 Types of Debentures
Sole Debenture Serial Debenture

• Usually repayment may be requested
automatically in the event of dissolution
of company or other events which
caused company fail to explain
company debts.
• Section 158 (6) – The doc can only be
stated as a debenture if the co prospectus
includes a statement that the co loan
repayment is guaranteed with charged on
co asset.

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 Rights of Debentures Holders
✘ Technically a debenture holder is a creditor and not a member
of the company. However, a debenture holder has more rights
compared to ordinary secured or unsecured creditor.

✘ The holders of debentures are conferred rights under the CA

2016, the common law as well as the debenture instrument.

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 Rights of Debentures Holders
S257 – requires the company to send a copy of its audited
1. Audited FS accounts to the debenture holder upon request.

S346 – if the affairs of the company are being conducted in a

manner which is oppressive to the debenture holders, he may
2. Oppression apply to the court for remedy.

Where the company fails to repay the loan stipulated in the

3. Sue for debenture, the debenture holder may take legal action to
payment enforce the company’s obligations

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Differences between Debenture holder and Shareholder
Debenture holder Shareholder

Meaning • A debenture holder is a subscriber to • A shareholder subscribes to the shares of the

debentures. company.
• Debentures are parts of loan. • Shares represents the capital of the company.
• Debentures represents the debt of the
company.
Status of A debenture holder is only a creditor of company. A shareholder is the joint owner of a company.
holder Therefore, has limited interest in the company. Therefore, has multiple interest in the company.
Right to attend A debenture holder is not invited and has no right A shareholder is invited to attend and has the right
meeting or to vote unless any decision affecting his/her to vote in the AGM of the company.
voting interest is made.

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Differences between Debenture holder and Shareholder
Debenture holder
Payment of • Interest on debentures is payable regardless
return whether there are profits or not.
• Interest paid out of capital.
Preferences • Debentures are generally secured and carry a
charge on the assets of the company.
• As a secured creditor, the debenture holder is
paid off before a shareholder in the event of
winding up of a company.
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Shareholder
• Dividends on shares is to be paid only when the
company has earned profits.
• Dividend can never be paid out of capital.
• Shares are not secured with any charges on the
company’s assets.
• Shares are repaid after the payment of all the
liabilities of the company.
 Company Charges
✘ A trading company has implied power not only to borrow but to charge its
assets as securities.

✘ In the event the company fails to repay the loan which is secured against
the company’s assets, the lender has resource against the assets.
✘ The assets are sold and the proceeds used to settle the loan.

✘ Furthermore, a company may create a charge over its assets to secure not
its own borrowings but that of 3rd party. It is know as 3rd party charge.

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 What is Charges?

Section 2 – include a mortgage and any

agreement to give or execute a charge or
mortgage whether upon demand or otherwise.

The charge may be legal or equitable, and it includes any

security for repayment of a debt.

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 Types of Company Charges

Charge

1. Fixed
Charge

2. Floating
Charge
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 1. Fixed Charge
✘ A fixed charge is a charge which attaches to specific assets
owned by the company.

✘ As the fixed charge is attached to the assets, the company

cannot deal with the assets unless with the prior consent of the
lender.

✘ If the company were to do so, without the lender’s prior

consent, the assets continue to be subject to the charge until
they are released by the lender.
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 1. Fixed Charge

✘ Example;

✗ “Rock & Row Sdn Bhd had created a fixed charge over
its machinery to the lender. Rock & Row Sdn Bhd
subsequently sold the machinery.

✗ In the event of default by Rock & Row Sdn Bhd, the

lender can still trace the machine to the buyer, and
exercise its power under the charge instrument and sell
it.”
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 2. Floating Charge
✘ A company may also create a floating charge over its present and
future assets. A floating charge is a charge on a class of assets e.g.
stock in trade

✘ As the charge “floats” over the assets and does not attach to the assets,
the company may continue to deal with the charged assets in its
ordinary course of business.

✘ If the charge is over a class of assets, it will also “float” over assets of
that class which are subsequently acquired by the company.

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 2. Floating Charge
✘ Example;

✗ “Car Vroom Bhd deals in used cars. On November 10, 2016, it created a
floating charge over its stock in trade in favour of Bank Mesra Bhd.

✗ At the time the floating charge was created, Car Vroom Bhd had 40 cars
in its stock. Today, there are 75 cars in its stock. As the charge is above
the stock in trade, the charge floats over all the assets in that class.
Currently, it floats over all 75 cars.

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 2. Floating Charge
✘ In summary, the characteristics of a floating charge are as follows:

1. It is a charge usually over a class of assets present and future;

2. The assets may change from time to time in the company’s
ordinary course of business;
3. Until the charge crystallizes, the company can deal with the
assets in the ordinary course of its business;
4. On occurrence of certain event, the charge will attach and
become fixed.

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 Difference Between Fixed Charge and
Floating Charge
Basis of Comparison Fixed Charge Floating Charge
1. Meaning Charge that can be ascertained with a Charge that is created on the assets
specific asset. of a circulatory nature.

2. Nature Static Dynamic

3. Registration of Charge Compulsory Compulsory

4. Status A legal charge An equitable charge

5. Preference First Second

6. Asset type Non-Current Asset Current Asset

7. Dealing in Asset The co has no right to deal with the The co can use or deal with assets,
property/asset. until crystallization.
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 Priority of Company Charge
✘ There are cases where the same assets are subject to 2 different
charges in favor of different lender. Both charges a valid.

✘ In the event there is a default by the company, the assets will be sold,
and the proceeds used to settle the amounts outstanding under the 2
charges.

✘ If the proceeds are sufficient to pay both charges, no dispute will arise.
However, if the proceeds are insufficient, who will have the priority
over the proceeds??
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 Priority of Company Charge

Floating v Floating Fixed v Fixed

The 1st charge will have The 1st charge will have
priority priority

General Principles

Floating v Fixed
Fixed v Floating
The 1st charge is a
The 1st charge is a fixed
floating charge,
charge, followed by a
followed by a fixed
floating charge, then
charge, then the fixed
the fixed charge will
charge will have
have priority
priority
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 Registration of Company Charges
✘ To protect the company’s creditor and persons dealing with the company,
S352 requires details of charges created by the company to be registered
with ROC.

✘ S352(1) provides that the company shall register the details of the charge
with ROC within 30 days from is creation.
✗ If contravene subsection (1) – the charge is VIOD
✗ The loan shall immediately be payable
✗ Company and every officer liable to a fine not exceeding RM50,000

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 Registration of Company Charges
✘ The registration is using the form prescribed by the ROC.
Among the information required are:

 Name of the person entitled to the charge • Date the charge was created
 Amount secured by the charge • What assets are charged?
 Whether there is any prohibition on the • Whether the charge is a fixed or floating?
creation of subsequent charges • Other salient terms & conditions

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 Company Charge - Prohibition by
Companies Act 2016
1. S123 – prohibits a company from giving financial assistance including
a charge to person to buy its share

2. S224 – prohibits a company from giving any security for a loan

granted to its director or the director of its related company

3. S225 – prohibits a company from giving any security for a loan

granted to a person connected with its director or the director of its
holding company.

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 THE END…
✘ Thank You

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