Capital Reduction Under Companies Act 2016: Two Different Routes

March 2018
by Wong Mei Ying, Yoon Ming Sun, Lee Sen Ching

The information in this article is intended only to provide general information and does not constitute professional advice or legal opinion.

@2018 Chooi & Company + Cheang & Ariff.
All rights reserved.

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 sanctioned by a court order (“Court Confirmation Procedure”) save as otherwise provided in the Companies Act 1965. Under the CA 2016, a company may now reduce its share capital by any of the following methods unless provided otherwise in its constitution:

  • Court Confirmation Procedure in accordance with section 116; or
  • a special resolution supported by a solvency statement in accordance with section 117 (“Solvency Statement Procedure”).

The CA 2016 envisages, amongst others, the following ways for a company to reduce its capital:

  • by extinguishing or reducing the liability on any of its shares in respect of share capital not paid up;
  • by cancelling any paid up share capital not represented by available assets;
  • by paying back to its members / shareholders any paid up share capital which is in excess of the needs of the company.

The three methods set out above are not exhaustive and not mutually exclusive.

Court Confirmation Procedure

The Court Confirmation Procedure is as follows:

  1. The members of a company must pass a special resolution to approve share capital reduction of the company.
  2. The company must thereafter seek confirmation from the Court.
  3. If the reduction of share capital involves diminution of liability in respect of unpaid share capital or payment of any paid-up share capital to any shareholder,
    1. a creditor of the company, if any, is entitled to object to the reduction of the share capital if such creditor, as at the date fixed by the Court, is entitled to any debt or claim which would be admissible in proof against the company as if that date were the date of commencement of the winding up of the company;
    2. the Court will settle a list of creditors who are entitled to object, ascertain the names, nature and amount of debts or claims of the creditors and may publish notices fixing a final day which creditors not entered in the list may claim to be so entered; and
    3. if any creditor entered in the list whose debt or claim is not discharged or has not been determined, does not consent to the reduction, the Court may dispense with the consent of that creditor on the company securing payment of his debt or claim by appropriating as the Court directs,
      1. if the company admits or is willing to provide for the full amount of the debt or claim, the full amount of the debt or claim; or
      2. if the company does not admit and is not willing to provide for the full amount of the debt or claim or if the amount is contingent or not ascertained, an amount fixed by the Court after similar inquiry and adjudication as if the company were being wound up by the Court.
  1. The Court may, after considering any special circumstances of any case, direct that all or any of the provisions of paragraph 3 above shall not apply with regards to any class of creditors.
  2. The Court may make an order confirming the reduction if the Court is satisfied with respect to every creditor who is entitled to object, that his consent to the reduction has been obtained or his debt or claim has been discharged, determined or secured.
  3. The Company shall then lodge the Court order with the Registrar of Companies (“Registrar”). The resolution for reducing share capital as confirmed by the Court order shall take effect upon such lodgment.
  4. The Registrar will then issue a notice confirming the share capital reduction which shall be conclusive evidence that all the requirement of the CA 2016 with respect to reduction of share capital have been complied with and that the share capital of the company is as stated in the order.
  5. Upon lodgment of the order of the Court, the particulars shown in the Court order shall be deemed to substitute the corresponding particulars in the constitution, if any, and such substitution and any addition ordered by the Court to be made to the name of the company shall be deemed to be alterations of the constitution for the purposes of the CA 2016 for such period as is specified in the order of the Court.

Solvency Statement Procedure 

The Solvency Statement Procedure is as follows:

  1. All directors of a company must make a solvency statement in relation to the reduction of share capital.1
    • For a private company, within 14 days ending with the date of the special resolution passed by members of a company to approve reduction of share capital of the company.2
    • For a public company, within 21 days ending with the date of the special resolution passed by members of a company to approve reduction of share capital of the company.3

Please see below (Solvency Statement Requirements) for the requirements in relation to a solvency statement for the purposes of reduction of share capital of a company.

  1. A solvency statement is not required if the reduction of share capital is solely by way of cancellation of any paid up capital share capital which is lost or unrepresented by available assets.
  2. Members of a company must pass a special resolution to reduce the Company’s capital.
    • For a private company, if the resolution is to be passed by way of a written resolution, every copy of the resolution must be accompanied by the solvency statement,4 or if the resolution is to be passed at a general meeting, the solvency statement must be made available for inspection by the members throughout the meeting.5
    • A public company shall make the solvency statement available for inspection by the members throughout the meeting at which the resolution is to be passed.6
    • The solvency statement of a public company or private company must be made available at the company’s registered office for inspection by its creditors for six weeks from the date of the resolution.7
  1. The company must send a notice to the Director General of Inland Revenue Board and the Registrar within seven days of the resolution being passed, which shall state that the resolution has been passed and contain the text of the resolution and the resolution date.8 The company must also lodge a copy of the solvency statement with the Registrar together with the notice.9
  2. A company must advertise a notice of the reduction of the share capital in one widely circulated newspapers in Malaysia in the national language and one widely circulated newspapers in Malaysia in the English language not later than seven days from the date of the passing of the special resolution (“Advertised Notice”).
  3. Any creditor may apply to the Court to cancel the resolution within six weeks from the date of the resolution by serving the application on the company and give the notice of application to the Registrar as soon as possible.
  4. If no application for cancellation of the resolution is received from any of the company’s creditors after six weeks, the company shall lodge the following documents with the Registrar before the end of eight weeks from the date of the resolution:
    • a copy of the resolution;
    • a copy of the solvency statement, if applicable;
    • a statement made by the directors confirming that the requirements under section 117(1) and the solvency requirements under section 117(3), if applicable, have been complied with10, and that no application for cancellation of the resolution has been made; and
    • a copy of the Advertised Notice. 
  1. If application(s) for cancellation of the resolution is made by any creditor of a company and the proceedings for the applications have been brought to an end as the Registrar may allow, the company shall lodge the following documents with the Registrar within 14 days beginning with the date on which the last such applications were brought to an end;
    • a statement made by directors confirming that the requirements under subsection 117(1), the solvency requirements under subsection 117(3), if applicable and subsection 117(5) or (6) have been complied with11, and that the application were brought to an end or without determination;
    • a copy of the Court order dismissing the application, if applicable; and
    • a notice containing information relating to the share capital reduction.
  1. The capital reduction takes effect when the Registrar records the information lodged in the appropriate register.

Solvency Statement Requirements

  1. A solvency statement is a statement that each director has formed the opinion that the company satisfies the solvency test in relation to the reduction of share capital. 
  1. The solvency statement must be:
    • in a manner as may be determined by the Registrar;
    • stating the date on which the statement is made and the name of each director making the statement; and
    • which shall be signed by each director making the statement and supported by a declaration to the effect that the directors have made an inquiry into the affairs of the company.
  1. In forming an opinion for the purposes of making a solvency statement, a director shall inquire into the company’s state of affairs and prospects and take into account all the liabilities of the company, including contingent liabilities. 
  1. A company satisfies the solvency test if:
    • immediately after reduction of share capital, there will be no ground on which the company could be found to be unable to pay its debts;
    • in the case where the company intends to commence the winding up within 12 months after the date of the share capital reduction, the company will be able to pay its debts in full within 12 months after the commencement of the winding up or in any other case, the company will be able to pay its debts as the debts become due during the period of 12 months after the date of the share capital reduction; and
    • its asset is more than its liability as at the date of the share capital reduction.

A director who makes a solvency statement without having reasonable grounds for the opinion expressed in the statement commits an offence and shall on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding RM500,000 or to both.

Conclusion

Although the Solvency Statement Procedure may be a more convenient way to carry out capital reduction without involving the court compared to the Court Confirmation Procedure, directors of companies which intend to implement capital reduction via the Solvency Statement Procedure should take note of the penalty for making a solvency statement without having reasonable grounds.

 

1 Section 117(3)(a), CA 2016
2 Section 117(3)(b)(i), CA 2016
3 Section 117(3)(b)(ii), CA 2016
4 Section 117(5)(a), CA 2016
5 Section 117(5)(b), CA 2016
6 Section 117(6)(a), CA 2016
7 Sections 117(5)(c) and 117(6)(b), CA 2016
8 Section 117(1)(a), CA 2016
9 Section 117(3)(c), CA 2016
10 See paragraphs 1 and 4 of the Solvency Statement Procedure
11 See paragraphs 1, 3 and 4 of the Solvency Statement Procedure


The information in this article is intended only to provide general information and does not constitute professional advice or legal opinion.

@2018 Chooi & Company + Cheang & Ariff.
All rights reserved.