The share capital of a company is the only security on which creditors rely. So, any reduction of share capital diminishes the fund out of which they are to be paid. As a result, companies with shares are not allowed to reduce the capital frequently.
Did your constitution Say “No” on capital reduction?
In the event where the constitution does not authorize the reduction of capital, then the procedure for amending the constitution shall first be carried out.
Reduced share capital process is complicated, especially if company have any debts/liabilities, party involved:
- Creditor, Bank
- Court (depends)
Methods to reduce share capital:
A. Pass a special resolution and confirmation by the Court (Section 116)
B. Pass a special resolution supported by a solvency statement (Section 117)
- Pass a special resolution to reduce the paid-up share capital of the company.
- Send a notice to IRB’ Director-General and SSM within 7 days from when the resolution is passed.
- Meets the solvency requirements.
- Company makes the solvency statement or a copy thereof available for inspection without charge by its creditors at its registered office for six weeks from the date of the resolution
- Advertise a notice of the SCR not later than 7 days from the date of the resolution in two widely circulated newspapers in Malaysia – one in Bahasa Malaysia and one in English.
- Any creditor of the company may apply to the High Court for the resolution to be cancelled within 6 weeks from the date of the resolution.
- The capital reduction will only take effect when the resolution is being recorded by the registrar.
What is solvency test?
In simple words, your company is solvent, no issue to pay the debts/ liabilities when is due within 12 months.
the assets of the company exceed the liabilities of the company at the date of the transaction.
Director making the statement has to declare that he has formed the opinion that the company satisfies the solvency test.
If the solvency 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.