Maintenance of Capital

Self purchase & financial assistance

Reduction of CapitalDividend

The doctrine developed to protect the creditors.

Creditors have the right to have the share capital applied for the purpose of operating the business of the company

Introduction

The creditor…gives credit to the company on the faith of the representation that the capital shall be applied only for the purpose of the business and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders.

Re Exchange Banking Co – Jessel MR

Purchasing own shares Lending money on the security of their own

shares. Giving financial assistance to purchase own

shares Reducing its capital except as provided by

the Act Paying dividend out of capital

The Doctrine (MoC) prohibits:

Sec 67 (1) – A company is prohibited to:

Acquire its own shares.Give financial assistance for the acquisition of its own share.Lend money on the security of its own shares

Share buyback & financial assistance

Amount to return of the capital to the members – cannot be made except with the court sanction.

To protect the creditors. May allow the current board and senior

management to have control. May allow for manipulation of share price.

(a) Purchasing own shares – Why not?

F: The executors of W (deceased shareholder) sold his shares in the company to it. Payment – by two installments. Prior second installment - the company went into liquidation. The executors claimed the payment from the company’s liquidator, T. (The company’s AOA authorised purchasing own shares)

Case : Trevor v Whitworth

Held: A company had no power to purchase its own shares even if its articles permitted such acquisition.

“…they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business”

per Lord Watson

F: An agreement between majority and minority shareholders. The company would purchase the shares of the minority at a certain price.

H: Sec 67 clearly prohibits the purchase by the company of its own shares or any direct or indirect financial assistance by it for the purchase of its own shares.

Mookapillai v Liquidator, Sri Saringgit Sdn Bhd

Prohibits purchase of shares in a holding by its subsidiary.

Sec 17 (1) :reinforces the rule that a subsidiary cannot own shares of its holding – it amounts purchase by the holding of its own shares

Holding - Subsidiary

(1) Public company if authorise by its articles

(2) A company shall not purchase its own shares unless:

(a) Solvent – will not cause insolvency(b) Through Stock Exchange, in accordance

with its rules(c) Good faith, company’ s interests

Exception – Sec 67 A

Reg 18A of Co. Regulation 1966 Declaration of solvency; send copies to

CCM, Stock Exchange, SC Chapter 12 of BM Listing Requirement 12.03 - Ordinary resolution 12.15 - buying back should not result co’s

issued/paid up below prescribed min.

Other rules besides Sec 67A

Sec 67A (3) : may apply share premium account for share buyback;

Sec 67A (3A) : cancel or retain as treasury shares;

Sec 67A (3B) : distribute as dividends or resell at the Stock Exchange

Sec 18 (2) (c)-there is injustice or oppression Sec 61

- redemption of redeemable preference shares

Other Exceptions

(b) Financial Assistance – Sec 67 (1)A company or its subsidiary cannot give FA to any person whether directly or indirectly for the purpose of enabling that person to purchase the company’s shares or of its holding company.

Includes: giving loan, guarantee, security

(i) Making or giving loan Where a company gives FA for the purpose

of acquiring shares in it in the form of loan. Not repaid, the company lost part of its

issued capital Effect – same as purchasing its own shares

(ii) Lending money on the security of its shares

Chung Kiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor

F: Bank gave loan to a company to buy shares in H. The security for the loan is the H’s landH: in breached of sec 67 (1).

KL Sdn Bhd & Anor v LGH & OrsF: Co (Chen Hua Development) owned land (Taman Hilltop) Developer (Kidurong) was contracted to build houses. Dev agreed to transfer some of the houses to the shareholders in exchange for their shares. Dev financed the development by charging co’s land to the finance company.

H: The transfer of shares in the company to D was financed by the company by way of charging a land owned by the company – infringed sec 67 (1)

Release of a debt – if the release reduce the price payable for the shares.

EH Dey Pty Ltd v Dey

Other transaction

EH Dey Pty Ltd v DeyF: Dey was a shareholder in a Co. (Eh Dey Pty Ltd) Dey owed money to the Co. (unpaid capital) Mr & Mrs Paul wished to purchase shares in Co. The Co reduced the amount owed by Dey. Mr Mrs Paul then bought the share at lower price.

Assistance to vendor of sharesArmour Hick Northern Ltd v Armour Trust LtdF: A Ltd (subsidiary) B Ltd (Holding); C Ltd is the shareholder of B Ltd (shareholder).W & H directors in both A Ltd and B Ltd. B Ltd owed money to C Ltd. W & H arranged A Ltd to pay B’s debt in return C Ltd sell its hare in B to H & W.

H: This amount to be FA by a subsidiary for the purpose of acquisition of shares in its holding company.

Acquisition of assets by a companyBelmont Finance Corporation LtdF: G wanted to acquire shares in Belmont Finance. G controlled Maximum. G sold to BF all shares in M. Fund he obtained was used to buy shares in BF.

H: There was FA given to G in order to enable him to acquire shares in BF. The sale of M to B was not a bona fide commercial transaction but a device to enable G to use BF’s own funds to acquire BF’s shares.

Lori (M) Sdn Bhd v Arab M’sian Finance Bhd

F: MARA offered to sell its shares in Lori to Technivest. Tech obtained loan from Bank & secured by land owned by Lori (transaction was aborted)Three months later Tech obtained loan from Bank as working capital. Tech informed bank that the shares purchased from MARA had been transferred and fully paid up prior to the giving of the loan and the creation of a security in favour of the bank.

Link between the assistance & the purchase of the co’s shares

H: There was no FA – a bona fide commercial transaction. The security given by Lori was given after the shares transaction had been completed and after the shares had been transferred and fully paid up.

ISSUE: Whether Sarjana had given FA to Pasti Hasil for the purpose of subscription shares in SarjanaF: S sold land to PH, in the agreement – RM1 mil was to be treated as a purchase of S’s shares by PH

Datuk Tan Leng Teck v Sarjana Sdn Bhd

H: There was FA by S in the acquisition of shares by PH in S.The transaction was structured in such a manner that resulted PH acquiring the shares without making any payment – not bona fide transaction.S&P – the amount of the sale was to be used to pay for the shares issued by S to PH.

The assistance must come from the company not from the shareholders

case : Cheah Theam Swee (1989) 1 MLJ 426 at 440.

Intraco Ltd (1995) 1 SSLR 313F: City Carton (CC) owed Intraco. Multi Pak (MP) would pay the debt and Intraco would subscribe shares in MP. The transaction executed by MP & Intraco issued a cheque & banked at the same timeThe transaction was a debt – equity swap in the context of corporate rescue.

Debt –equity swap does not amount to illegal FA

Sec 67 (2) (a)Where lending money is part of the ordinary course of business Sec 67 (2) (b) and (c)

The finance of a scheme by the company to enable the purchase of its shares for the benefit of its employees.

Exceptions to Financial Assistance

Sec 67 (3) – officer in default shall be guilty Sec 67 (4) – the officer may compensate the

company or any other person

Effect of Sec 67

Datuk Tan Leng Teck v Sarjana Sdn Bhd & Ors

H: The Transaction which is in contravention of the prohibition is still valid and enforceable as the section itself saves the transaction.

Cases

Confirmed by Federal Court in Lori (M) Bhd V Arab – Msian Finance Bhd

Sec 67 (6) has the effect of saving a transaction which contravened sec 67 (1) from invalidity.