Considerations for share capital reduction

Company Law

A company may reduce its share capital by either of the following methods unless provided otherwise in its constitution:
(i) A special resolution and confirmation by the Court (“Court Confirmation Procedure“); or
(ii) A special resolution supported by a solvency statement in accordance with section 117 of the Companies Act 2016 (“Solvency Statement Procedure“).

The Solvency Statement Procedure is faster and incurs less cost compared to the Court Confirmation Procedure. However, some companies may still choose Court Confirmation Procedure for their share capital reduction for the following reasons:

1. All directors of the company undertaking a share capital reduction by way of the Solvency Statement Procedure must make a solvency statement. If a director makes a solvency statement without having reasonable grounds for the opinion expressed in the statement, the director is liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM500,000 or to both, on conviction.

A solvency statement, however, is not required where the reduction of share capital is solely by way of cancellation of any paid-up share capital which is lost or unrepresented by available assets.

2. Reduction of share capital by way of the Solvency Statement Procedure is not immune from objection by creditors. Any creditor of a company undertaking a reduction of share capital by way of the Solvency Statement Procedure may apply to the Court for the resolution reducing the share capital of the company to be cancelled within 6 weeks from the date of the resolution.

3. After proceedings for all applications by creditors to the Court have been brought to an end in favour of the company, the company must lodge with the Registrar of Companies, a statement made by the directors confirming that certain requirements under the Solvency Statement Procedure have been complied with.

If the confirmation statement is false or not believed by a director making the statement to be true, the director is liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM3 million or to both, on conviction.

The director’s personal liability as set out in items 1 and 3 above may not be so much of a concern to private companies where the directors and shareholders are the same persons. They are likely to be comfortable providing the necessary solvency statement and confirmation statement as they are involved in the day-to-day management of the companies.

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This post was first posted on Linkedin on 28 June 2021.

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