Shares and Capital Maintenance
What is tested
Shares and capital maintenance tests how shares are issued, paid for and reduced, and when distributions are lawful. The CA 2016 no-par-value regime is examinable.
Core rules
- Since 31 January 2017 shares have no par value; share premium and the par-value discount rules no longer operate as before. Shares may be issued for cash or other consideration, which must be adequate and bona fide.
- A dividend may be paid only out of profits available for distribution (s 131). The company must also satisfy the solvency test (s 132): it must be able to pay its debts as they fall due within 12 months after the distribution.
- A company may purchase its own shares under s 127 with a solvency statement, subject to the 10% treasury-share limit and the constitution.
- Capital reduction may be effected by special resolution supported by a solvency statement (ss 115-116) or by court order.
- Capital must not be returned to members except through a permitted reduction, buy-back, liquidation or lawful dividend.
Worked example
A company has retained profits of RM200,000 and cash of RM500,000. The directors propose a RM250,000 dividend. Only RM200,000 is distributable; the extra RM50,000 would be an unlawful return of capital. Even the RM200,000 requires a solvency check: after paying it, can the company meet debts for 12 months? If not, the dividend must be reduced or withheld.
Traps
Paying dividends from share capital or revaluation reserves; treating cash as profit; skipping the solvency test; assuming treasury shares carry voting rights (they do not); issuing shares for inadequate consideration; confusing a bonus issue with a capital reduction.