Share Capital Reduction for Malaysian Companies

Did you know that if a company has a high share capital, it could be detrimental to the company? Many companies incorporated in Malaysia have looked to maintain their share capital at an acceptable level for various reasons which will be discussed in this article.

What is Share Capital Reduction?

Moreover, the process of decreasing the amount of a company’s shareholder equity is called share capital reduction. Companies can execute this through various methods such as share cancellations and share repurchases, also known as share buybacks.

To create a more efficient capital structure and increase shareholder value, companies will look to reduce their share capital. It is important to note that while the company’s market capitalisation will not change because of the share capital reduction, the number of outstanding shares and traded shares will decrease.

Another scenario where capital reduction may be executed is to respond to a decline in operating profits or loss of revenue that cannot be recovered from a company’s expected future earnings. In some capital reductions, shareholders will receive a cash payment for shares that have been cancelled, but in most other situations, the impact on shareholders is minimal.

Reasons to Reduce Share Capital

There are multiple reasons why a company might choose to reduce its share capital. These include:

1. Return of surplus capital

If the company plans to return surplus capital, it will no longer require shareholders of the company.

2. Unable to pay future dividends

This happens when the company does not have any distributable profits.

3. Change in capital structure

When reorganising, simplifying, or improving its capital structure, a company may look to reduce share capital. This may help the company to engage in greater debt financing and ultimately increase the influence of the company and growth rate.

4. Ensuring availability of distributable funds

This empowers the company to maintain the sustainability of dividend payments

Solvency Statement Procedure (Section 117)

A Malaysian corporation can reduce share capital by special resolution, notifying the Inland Revenue Board and Registrar within seven days.

If all the company directors sign a solvency declaration regarding the reduction of share capital, they have met the conditions for solvency.

1. For private companies, the solvency statement must be made within 14 days ending with the date of a special resolution passed by members of a company to approve the reduction of share capital
2. For public companies, the solvency statement should be made within 21 days with the same conditions as stated above

The company must notify the IRB Director-General and registrar within 7 days of resolution to reduce paid-up capital.

There are certain requirements of a Solvency Statement that have to be met namely:

• A solvency statement is a declaration that each director believes that the company meets the solvency criteria concerning the cut in share capital
• The Registrar determines how to present the solvency statement, and making the statement requires clearly stating the date and name of each director. All signatures must have support from a declaration indicating that a third party has inquired into the affairs of the company.
• All considered liabilities, including contingent liabilities, before making the solvency statement.
• The company should only make a solvency statement if it has sufficient funds to pay its debts after reducing share capital.
• The company will fully pay off its debt within 12 months if it winds up.
• Assets in the company are more than the liability as of the date of the share capital reduction

Members of a company must pass a special resolution to reduce a company’s capital.

1. Private companies must present a written resolution, and every copy of the resolution must accompany the solvency statement throughout the meeting.
2. Public companies must make the solvency statement available to everyone in the meeting to allow checking and inspections.
3. Both private and public companies must make the solvency statement available at the company’s registered office for creditors to check within 6 weeks of the resolution. If there are no objections, the company must lodge the resolution with the registrar for recording purposes within 6-8 weeks alongside the necessary documents under section 119 (1) of the Act

Court Confirmation Procedure (Section 116)

Although the reduction of shares by Solvency Statement Procedure may be slightly faster and incur less cost, some companies still chose the Court confirmation procedure. The procedure is as follows:

Members must pass a special resolution for share capital reduction, followed by seeking Court confirmation per the solvency statement procedure.

The Court will consider any special circumstances related to liability diminution or payment in paid-up capital to shareholders.

Moreover, the court will then make an order confirming the reduction if the Court is satisfied that every creditor is pleased with the order.

However, the company lodges the court order with the Registrar; share capital reduction takes effect upon lodgment.

The reduction will take place once a resolution is under review.