Under the Companies Act 2016 of Malaysia, a company which intends to carry out reduction of share capital may do so by any of the following methods unless provided otherwise in its constitution:

• a special resolution and confirmation by the Court (“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”).

Although reduction of share capital by way of Solvency Statement Procedure may be faster and incur less cost, some companies nonetheless choose to carry out capital reduction by way of Court Confirmation Procedure for the following reasons:

1. If a company undertakes a reduction of share capital by way of the Solvency Statement Procedure, all directors of the company are required to make a solvency statement. 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. If a director makes a solvency statement without having reasonable grounds for the opinion expressed in the statement, such director 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.
2. Reduction of share capital by way of the Solvency Statement Procedure is not immune from challenge 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 six 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 directors are required to 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 statement is false or not believed by a director making the statement to be true, such director, shall on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding RM3 million or to both.

Takeaway

A company which intends to undertake reduction of share capital should consider which route is more suitable for its purpose. The company should take into consideration the points above in deciding whether to undertake reduction of share capital by way of the Solvency Statement Procedure or the Court Confirmation Procedure.

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

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