Dividend out of Losses and a Loan-Funded Buy-Back
Borneo Harvest Sdn Bhd has 2,000,000 ordinary shares and accumulated losses of RM1.8 million. For the year ended 31 December 2025 it made a net profit of RM600,000, mainly from a one-off land sale. At a board meeting on 14 February 2026, the directors propose a dividend of RM0.25 per share (RM500,000) and a selective buy-back of 200,000 shares (10%) from a departing shareholder, Puan Zahra, at RM6.00 per share (RM1.2 million). The company has cash of RM300,000. A director, Mr Lau, has arranged a five-year term loan of RM1.5 million from a bank, to be drawn before the buy-back. The constitution authorises share buy-backs, but no shareholders' resolution has been passed. Mr Lau signs a solvency statement saying the company 'will remain solvent for 12 months'. The company secretary is asked to prepare the dividend and buy-back documents and to update the register.
1. Can Borneo Harvest pay the RM500,000 dividend?
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A dividend is not paid from cash flow or from a one-off profit in isolation. The starting point is distributable profits: accumulated realised profits less accumulated realised losses. Borneo Harvest has accumulated losses of RM1.8 million. The RM600,000 profit from the land sale is realised, but it does not automatically wipe out the accumulated losses. Until those losses are made good, there are no distributable reserves; paying RM500,000 would be a distribution out of capital. The solvency test is additional, not a substitute. The company has only RM300,000 cash and proposes to borrow RM1.5 million for the buy-back, so the dividend would also leave it thin. Directors who authorise an unlawful dividend may be liable to repay it and may commit an offence; the secretary should refuse to prepare the documents and should minute the advice. If the directors want to distribute, they need a valid capital reduction or a properly supported profit position, not a board resolution.
2. Can the selective buy-back proceed, and what is wrong with the funding and solvency statement?
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A share buy-back is not a simple purchase. The constitution must authorise it (it does), and the shareholders must approve it in the required manner; a selective buy-back from one shareholder is more sensitive and normally requires special resolution. No shareholders' resolution has been passed, so the buy-back cannot proceed. The funding is also wrong: a buy-back must be made out of profits or the proceeds of a fresh issue of shares, not a bank loan. Using a term loan would effectively return capital borrowed from a creditor, defeating capital maintenance. The solvency statement is defective: it appears to be signed by Mr Lau alone, whereas the Act requires the directors to make the statement, and it must address the company's ability to pay its debts as they fall due for the following 12 months. On the figures, with RM300,000 cash and a RM1.2 million payment, solvency is doubtful. The 10% limit is also engaged; even at exactly 10%, the other conditions still apply.
3. What are the directors' and secretary's exposures, and what should be done with the register?
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The directors risk personal liability for the unlawful dividend and for any improper return of capital. If the buy-back is completed without approval, it is likely void or unlawful, and the directors may have to compensate the company; the secretary who knowingly lodges false or defective documents risks personal liability and disciplinary action. The secretary should not update the register to reflect the buy-back until the transaction is validly approved and completed. For the dividend, no entry should be made in the accounts as a liability. The correct sequence is: convene a board meeting, withdraw the defective solvency statement, obtain legal and accounting advice, prepare a circular for shareholders, and, if a buy-back is still desired, pass the required resolution and use permitted funds. If the company cannot satisfy the solvency test, it should consider a capital reduction with the appropriate procedure, or simply not proceed.