Legal Insights Issue 3/2017, September 2017 – “NEW CAPITAL REDUCTION PROCEDURE AND WHITEWASH EXEMPTION FOR FINANCIAL ASSISTANCE“

NEW CAPITAL REDUCTION PROCEDURE AND WHITEWASH EXEMPTION FOR FINANCIAL ASSISTANCE

 

Julia Chow and Ebbie Wong explain two new concepts in the Companies Act 2016

 

 

The Companies Act 2016 (“CA 2016”) which came into operation on 31 January 2017 (with the exception of certain provisions which are not relevant to this article) introduces various new concepts into Malaysian company law. These new concepts include an alternative procedure for the reduction of share capital and a whitewash exemption for the provision of financial assistance for the purchase of shares.

 

THE SOLVENCY TEST

 

Both of the newly-introduced concepts mentioned above require a solvency statement to be made in the prescribed form, whereby each director making the statement has to declare that he has formed the opinion that the company satisfies the solvency test laid out in section 112(1) of the CA 2016, namely that:

 

(a)    immediately after the transaction there will be no ground on which the company could be found unable to pay its debts;

 

(b)    the company will be able to pay its debts as the debts become due during the period of 12 months immediately following the date of the transaction or it is intended to commence winding up of the company within 12 months after the date of the transaction and the company will be able to pay its debts in full within 12 months after the commencement of the winding up; and

 

(c)     the assets of the company exceed the liabilities of the company at the date of the transaction.

 

The solvency test has been discussed in greater detail in Legal Insights Issue No. 2/17 (June 2017).

 

ALTERNATIVE PROCEDURE FOR CAPITAL REDUCTION

 

The previous regime under the Companies Act 1965 (“CA 1965”) provided that a company may only reduce its share capital by a special resolution subject to confirmation of the reduction by the Court. The CA 2016 retains this concept but also introduces an alternative procedure whereby a company may reduce its share capital by passing a special resolution which is supported by a solvency statement (“Section 117 Capital Reduction”).

 

Procedural requirements

 

The procedure for carrying out a Section 117 Capital Reduction may be summarised as follows:

 

(1)      All directors of the company make a solvency statement in relation to the reduction of share capital;

 

(2)      The company passes a special resolution to reduce its share capital in accordance with its constitution within 14 days (in the case of a private company) or 21 days (in the case of a public company) from the date of the solvency statement;

 

(3)      The company sends a notice to the Director General of the Inland Revenue Board and the Registrar of Companies (“Registrar”) within 7 days of the date of the resolution. The notice must state that the resolution has been passed and contain the text and the date of the resolution. A copy of the solvency statement is to be lodged with the Registrar together with the notice;

 

(4)      The 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; and

 

(5)      The company advertises a notice of the reduction of share capital within seven days from the date of the resolution in two widely circulated newspapers in Malaysia – one in Bahasa Malaysia and the other in the English language.

 

The CA 2016 exempts a company whose reduction of share capital is solely by way of cancellation of any paid-up share capital which is lost or unrepresented by available assets from the requirement for a solvency statement.

 

Objection by creditor

 

Any creditor of the company may, within six weeks from the date of the resolution, apply to the Court for the resolution passed under the Section 117 Capital Reduction to be cancelled. The creditor is required to serve the application on the company as soon as possible. The company must, in turn, give notice of the application to the Registrar as soon as possible.

 

If the resolution has not been cancelled at the time when the application is to be heard, the Court may make an order cancelling the resolution (“Section 120 Order”) if any debt or claim on which the application was based is outstanding, and the Court is satisfied that:

 

(a)      the debt or claim has not been secured and the applicant does not have other adequate safeguards for the debt or claim; and

 

(b)      it is not the case that security or other safeguards are unnecessary in view of the assets that the company would have after the reduction.

 

The Court is required to dismiss the creditor’s application if it is not satisfied that there are sufficient grounds to make a Section 120 Order.

 

Effective Date of Section 117 Capital Reduction

 

If no application for cancellation of the resolution is made by any creditor, the company is required to lodge the documents specified in Section 119(1) of the CA 2016 with the Registrar within 6 to 8 weeks from the date of the resolution (i.e. within 2 weeks from the end of the period within which creditors may apply to Court for a cancellation of the resolution).

 

If one or more applications for cancellation of the resolution have been made, the proceedings for all such applications are to be brought to an end due to their being dismissed, withdrawn or for any reason as the Registrar may allow. The company is then required to lodge the documents specified in Section 119(2) with the Registrar within 14 days from the date on which the last of such applications was dismissed, withdrawn or bought to an end.

 

The reduction of the share capital will take effect when the Registrar has recorded the information lodged with him in the appropriate register. The Registrar will then issue a notice to confirm the reduction of share capital, which is conclusive evidence that all the requirements of the CA 2016 with respect to the reduction of share capital have been complied with.

 

THE WHITEWASH EXEMPTION FOR FINANCIAL ASSISTANCE

 

General prohibition

 

Under the CA 1965, a company was prohibited from providing financial assistance for the purpose of, or in connection with, a purchase or subscription of shares in the company or in its holding company. This general prohibition is retained in Section 123(1) of the CA 2016.

 

In addition to the general prohibition, a further restriction is introduced in Section 123(2) of the CA 2016 which prohibits the provision of financial assistance for the purpose of reducing or discharging any liability that has been incurred by a person in the acquisition of shares in the company or in its holding company.

 

The Whitewash Exemption

 

Notwithstanding the general prohibition on financial assistance, Section 126 of the CA 2016 introduces a “whitewash” exemption which allows a company whose shares are not quoted on Bursa Malaysia to provide financial assistance for the acquisition of its own shares or shares in its holding company, or for the reduction or discharge of any liability incurred for the purpose of such acquisition of shares.

 

The granting of financial assistance under the whitewash exemption however is subject to the following requirements:

 

(1)      The company must pass a resolution authorising the giving of financial assistance;

 

(2)      Before the assistance is given, the company must pass a directors’ resolution, setting out the full grounds of the conclusions of the directors, that (a) permits the company to give the assistance; (b) states that the giving of the assistance is in the best interest of the company; and (c) the terms and conditions under which the assistance is to be given are just and reasonable to the company;

 

(3)      On the same day that the resolution for financial assistance is passed, the directors who voted in favour of that resolution must make a solvency statement that complies with provisions in relation to the giving of the assistance;

 

(4)      The aggregate amount of the assistance and any other financial assistance given under Section 126 that has not been repaid must not exceed 10% of the aggregate amount received by the company in respect of the issue of shares and the reserves of the company, based on the most recent audited financial statements of the company;

 

(5)      The company must receive fair value in connection with the giving of the assistance; and

 

(6)      The assistance must be given not later than 12 months after the day on which the solvency statement was made.

 

Notification to members

 

Within 14 days from giving financial assistance under Section 126 of the CA 2016, the company must send to each member a copy of the solvency statement made in connection with provision of the assistance together with a notice that contains the following information:

 

(a)      the class and number of shares in respect of which the assistance was given;

 

(b)      the consideration paid or payable for those shares;

 

(c)       the name of the person receiving the assistance and, if a different person, the name of the beneficial owner of those shares; and

 

(d)      the nature, the terms and, if quantifiable, the amount of the assistance.

 

It is to be noted that the CA 2016 does not restrict the types of persons who are allowed to be given financial assistance under the whitewash exemption.

 

Penalties for contravention

 

The penalty that may be imposed on an officer of the company who contravenes the general prohibition against financial assistance in Section 123 is a term of imprisonment not exceeding five years, or a fine not exceeding RM3,000,000, or both. Although the maximum term of imprisonment remains unchanged from the CA 1965, the maximum fine has been increased substantially from RM100,000 to RM3,000,000 under the new CA 2016. As in the case of the CA 1965, a person who is convicted of the offence may also be ordered to pay compensation to the company or the person who has suffered loss or damage as a result of the contravention.

 

Further, the company and every officer who contravenes the whitewash exemption provisions in Section 126 may be liable to a fine not exceeding RM3,000,000 or imprisonment for a term not exceeding 5 years or to both. In the case of a continuing offence, a further fine not exceeding RM1,000 per day may be imposed for each day that the offence continues after conviction.

 

Continued validity notwithstanding contravention

 

A newly introduced Section 124 provides that the validity of the financial assistance and any contract or transaction connected with the financial assistance is not affected only by reason of the contravention of the provisions in the CA 2016 on financial assistance. 

 

CONCLUSION

 

The procedure for effecting a Section 117 Capital Reduction is a welcomed alternative to a court sanctioned capital reduction as it expedites the time frame and reduces the cost of implementation of a capital reduction exercise, in particular if no objections are made by the company’s creditors.

 

The whitewash exemption for the provision of financial assistance in connection with a purchase of shares in the company or its holding company is a slight liberalisation of the absolute prohibition under the CA 1965. The legislators have put in place various safeguards against the abuse of this procedure. Firstly, the total amount of the assistance that can be provided is limited to 10% of the company’s share capital and reserves. Secondly, the provision of assistance must be approved by a special resolution of members and a board resolution supported by a solvency statement. Thirdly, the giving of assistance must be in the best interest of the company and be on terms which are fair and reasonable to it. Fourthly, the severe penalties which may be imposed for contravention of the provisions against financial assistance may mitigate the risk of abuse. To prevent the company from being short-changed, the 2016 Act also makes it mandatory that the company receives fair value in connection with the giving of the financial assistance.

 

 

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