How Does A Company Reduce Their Paid-Up Share Capital?

Need to seek legal advice on how to reduce Paid-up Capital in Malaysia? Talk with Company Secretary or Business Lawyer:

Want to reduce your company paid-up share capital but have no clue on how to get about with it? Have no fear. In this article, we will briefly share two methods (which is stipulated under the Companies Act¹) in which your company may reduce its paid-up share capital. The two methods are:

A. Via a special resolution and confirmation by the Court (Section 116)²

The procedure:

1. The company will have to call for a special resolution to reduce the paid-up share capital of the company. Even if the special resolution is passed, the Court must approve the resolution before the company can reduce its paid-up share capital.
2. Once the court approves, the company may reduce the paid-up share capital by:
   1. Extinguishing or reducing the liability on any of the shares of the company in respect of unpaid share capital;
   2. Cancelling any paid-up share capital which is lost or unrepresented by available assets; or
   3. Returning the shareholders any paid-up share capital which is in excess of the needs of the company.
3. If the company proposes to reduce the paid-up share capital by either point a or point c above, the court, during the determination as to whether to allow the company to reduce the paid-up share capital, will require every creditor of the company who is entitled to any debt or claim against the company to voice their objection (if any) as to the proposed reduction. In this regard:
   1. The court will then draw up a list of creditors who are entitled to object, and will also give chances to those who are not to join the fray and to determine if their debt has been discharged;
   2. If there are creditors in the list who claim that their debt has not been discharged and does not consent to the reduction, the court may dispense with consent if:
      1. The company admits that they owe the creditor the debt claimed/ The company does not admit that they owe the creditor the debt claimed but is willing to provide for the full amount of the claim; or
      2. The company does not admit that they owe the creditor the debt claimed but is willing to allow the court to determine as to whether the company owes the creditor such debt and the amount that is due to the creditor in question.
         **At this juncture, it must be noted that the court can also disregard point 3 altogether if there are any special circumstances that warrant the court to do so.
4. Once the above is sorted out i.e. the creditor’s consent to the reduction has been obtained or the debt has been discharged/ determined or secured the court will then make an order confirming the reduction.
5. The order must then be lodged with the registrar.
   **After the reduction exercise, if a creditor suddenly shows up and claim that he missed (by reason of his ignorance) the “window” to join in the list of creditors as mentioned in point 3(a) and the company is unable to pay debt claimed:
   1. Every member of the company at the date of the lodging of the order is liable to contribute for the payment of that debt (not exceeding the amount in which the member is liable to contribute the day before the lodging of the order); and
   2. If the company is wound up, the court may order the company to draw up a list of those who are liable to contribute to ensuring that those contributors settle the debt.

B. Via a special resolution supported by a solvency statement (Section 117)³

**The ways in which a company can reduce its paid-up share capital is similar to that mentioned under section 116.

The procedure:

1. The company will have to:
   1. Call for a special resolution to reduce the paid-up share capital of the company;
   2. Send a notice to IRB’ Director-General and the registrar within 7 days from when the resolution is passed of its intention to reduce the company’s paid-up share capital; and
   3. Meets the solvency requirement under the law. In this regards, the company meets the solvency requirement if:
      1. All directors of the company make a solvency statement in relation to the reduction within 14 days ending with the date of resolution (for a private company)/ 21 days ending with the date of resolution (for a public company);
      2. Meet the requirements in section 117 (5) and (6) of the Act; and
      3. The statement is lodged together with the notice in point 1(b) mentioned above.
         **At this juncture, it must be noted that a company need not meet the solvency requirement under point 1(c) if the reduction is solely by way of cancellation of any paid-up share capital which is lost or unrepresented by available assets.
2. Once all the above is sorted out, the company will have to advertise the notice in one widely circulated newspaper in Malaysia in Bahasa and one in English not later than 7 days from the date of the passing of the special resolution.
3. The creditor of the company can also object under this section⁴. In this regard:
   1. Any creditor of the company who is entitled to any debt or claim against the company may apply to the court for the resolution to be cancelled within 6 weeks from the date of the resolution;
   2. The application must be served to the company as soon as possible and similarly, a notice of the application must be given to the registrar as soon as possible.
4. If there is an objection, the court⁵ will cancel the resolution if:
   1. The court determines that the debt has not been secured and the creditor does not have an adequate safeguard for the debt; and
   2. It is necessary for the safeguard to be in place in view of the assets that the company would have after the reduction.
5. If the creditor’s claim is successful, the court will then order the company to lodge the order of cancellation of the resolution with the registrar. Similarly, the court may also dismiss the creditor’s application⁶.
6. If no applications were made to object to the reduction by the company’s creditors, the company must lodge the resolution with the registrar for recording purposes after the end of 6 weeks and before the end of 8 weeks from the date where the resolution is passed, alongside the necessary documents stipulated under section 119 (1) of the Act.
7. If an application by the creditor has been dismissed by the court, the company must lodge with the registrar within 14 days beginning from the date of the last creditor’s application which was dismissed by the court the necessary documents stipulated under section 119 (2) of the Act to allow the resolution to be recorded by the registrar.
8. The reduction will only take effect when the resolution is being recorded by the registrar.

Need to seek legal advice regarding Paid-Up Capital in Malaysia? Talk with Company Secretary or Business Lawyer:

1. 2016

2. Section 115 (a), Companies Act 2016.

3. Section 115 (b), Companies Act 2016.

4. Section 118, Companies Act 2016.

5. Section 120, Companies Act.

6. Ibid.