SOALAN 3

Paid-up capital of Syarikat Alhamra Sdn Bhd amounting to RM180,000,000 divided into
45,000 class A shares with a value of RM2.00 each [issued capital] with a rate of 9%
accumulated dividend per annum [tiap tahun 9% dari dividen yang diuntungkan]. Datuk Daud
and Encik Lee own class A shares. The remaining share units of the company are from share
class B, which is 90,000-units with a nominal value of RM1.00, each owned by five board
members who hold 50% of the class, and the rest are evenly distributed among 27 other
shareholders in the company.

Alhamra Sdn Bhd’s constitution has provided that:

Article 4A: Holders of share class A have an accumulated dividend rate of 9% per
annum but no increase in subsequent profits.

Article 5: Class A holders prioritise return on capital over other shareholders at the
time of winding up and are entitled to any surplus after return to other creditors.

Since 2018, Syarikat Alhamra Sdn Bhd. has experienced financial difficulties and had to take
intensive financial structuring measures to overcome and control the losses that befell the
company.

The board of directors of Syarikat Alhamra Sdn Bhd held an extraordinary meeting (EGM) on
20.2.2020 by giving notice of the meeting 14 days earlier. At the meeting, the board approved
several plan schemes to overcome the company’s problems as follows: -

1. Reduce the dividend payment from 9% to 3% for share class A holders.

2. Cancel 50% of the total class B shares owned by 27 shareholders who have been paid
in full.

Datuk Daud and Encik Lee were not satisfied with the actions of the board of directors of
Syarikat Alhamra Sdn Bhd. and considered that the scheme would affect their rights as
shareholders of the company. However, the company board thinks that they have carried out
their duties in the best possible manner and have taken precautionary measures, and this is an
effective last resort that can save the company from financial trouble.

Advise the board of directors of Syarikat Alhamra Sdn Bhd.

ANSWER:

INTRODUCTION:*Emilia

Generally, an incorporated company will raise its funding through two sources of
funding, which is from the issue of shares and from borrowing. Before identifying the types of
shares in the current case, it is vital to understand the concepts of paid-up capital and issued
capital. Issued capital was the nominal value of share capital actually issued, whereas the paid-up
capital was the nominal value of share capital actually issued and paid-up by the members. Here,
the issued capital of Syarikat Alhamra Sdn Bhd is RM180,000,000, and at the same time paid-up
capital is also RM180,000,000.

Further, the company can issue different classes of shares according to Section 69 of the
Companies Act 2016, which provides that shares in a company may be issued in different classes
subject to the constitution of the company. Similarly, in Section 72 of the Companies Act 2016,
it is stated that a company having a share capital may issue preference shares which are subject
to the constitution of the company. In the present case, according to the constitution of Syarikat
Alhamra Sdn Bhd, they issued two classes of shares, which are Class A shares with 45, 000 units
with RM 2 each, and Class B shares with 90, 000 units with RM 1 each.Class A and Class B can
then be categorized as preferred shares. Preferred shares according to Section 2(1) of the
Companies Act 2016 means that a share which does not entitle the holder the right to vote on a
resolution or to any right to participate beyond a specified amount in any distribution whether by
way of dividend, or on redemption, in a winding up, or otherwise. Evidently, in our present case,
the shareholders do not have any rights to vote on the resolution made by the directors and this
constitutes them to own preference shares instead of ordinary shares. The issue then raises here is
whether the board of directors of Syarikat Alhamra Sdn Bhd is permitted to reduce the capital
shares of the shareholders without their consent.

According to Section 115 of CA 2016, a company may reduce its share capital by a
special resolution and confirmation by the Court in accordance with Section 116 of the CA 2016,
or by a special resolution supported by a solvency statement in accordance with Section 117 of
the CA 2016.

CONTENT:

a. Special Resolution *mei

Under Company Act 1965, Section 154 provided that a company must lodge a
copy of its special resolution together with the Registration of Company (ROC) within
 one month after it was passed. However, the said section is no longer applicable when the
requirement to lodge the special resolution with the ROC has been removed with the
effect from January 31,2017. The reduction of the share shall be supported by a solvency
statement and requires the support of the members' special resolution. In our case,
Syarikat Alhamra Sdn Bhd is a private company, hereby the special resolution shall be
passed by a written resolution or passed in a general meeting. According to section
306(4), a special resolution is deemed passed when the required majority members. Next,
as laid down under Section 292(1) and Section 292(2)(a)(i), members holding 75% of
voting shares need to give their consent to the written resolution as per Section 306(4).

The procedure for passing a special resolution at a general meeting is defined in

Section 292, which requires notice of at least 21 days to the members prior to the
meeting. Other than that, it requires at least 75% of the voting members during the
meeting to pass the special resolution. evidently, on 20.2.2022, the resolution passed by
Syarikat Alhamra Sdn Bhd in an extraordinary meeting (EGM) was by giving notice of
the meeting 14 days earlier which does comply with Section 292 that requires notice at
least 21 days. As aforementioned, since the board approved several plan schemes to
overcome the company’s problems, the procedure for passing a special resolution is still
in accordance with the Act. However, the situation might be different if the special
resolution was not passed within the said period, which will cause the special resolution
to not come into effect. To sum up, the special resolution made by the board of directors
of Syarikat Alhamra Sdn Bhd has come into effect since the notice was given 14 days
earlier.

b. Confirmation by the Court

*Section 116(1) of the CA 2016

According to the Section 116(1) of the CA 2016, it states that a company may reduce the
share capital of the company in any way by the confirmation of the Court. Section 116(1)(a)
includes extinguishing or reducing liability on any of the shares of the company in respect of
unpaid share capital. Unpaid capital of the company is the amount unpaid on shares issued which
could be called upon at any time. The debt due to the company is legally enforceable. In the case
of Poole and Others v National Bank of China the court had held that when a company had
passed a special resolution for reducing its capital, the Court has the jurisdiction to entertain a
petition, for an order confirming of such reduction of shares. There is no need to prove that the
capital which is to be canceled is lost or unrepresented by available assets. The petition to reduce
the capital will only be granted by the Court if the interests of the creditors are properly
safeguarded, and if the proposed reduction is a prudent and business like measure, not unfair to
any shareholder, or detrimental to the public.
 According to Section 116(1)(b), a company may reduce the share capital of the company
by cancelling any paid-up share capital which is lost or unrepresented by available assets. In the
case of Wilsons and Clyde Coal Co v Scottish Insurance Corporation where the company had
presented a petition for reduction of capital to be effected by returning to the holders of the
preference stocks their capital in full. The petition was opposed by the holders of 45 per cent of
the preference stocks on the ground that the proposed reduction was unfair and inequitable in
respect that the proposed extinction of the preference stocks by depriving the preference
stockholders prematurely of a high-yielding, well-secured investment, thus adversely affecting
their interests but benefiting the ordinary stockholders. It was held by the Lord President that the
proposed reduction of capital did not infringe the rights of the preference stockholders as set
forth in the memorandum and articles of association, which contained the terms of their contract
with the company where it states that the company might from time to time by special resolution
reduce its capital. This is different in the case of Re Holders Investment Trust where the court
had looked into an application to reduce capital of the company by cancelling redeemable
preference shares redeemable in 1971, in exchange for unsecured loan stock, redeemable some
four to nine years later. It was held by the court that shareholders voting in a class meeting in
connection with a reduction of capital must have regard to the interests of a class as a whole. The
vote was thus ineffective as the majority preference shareholders had voted in their own interests
without taking into consideration what was for the best for the preference shareholders as a class.

Lastly in Section 116(c) the company may reduce the capital of the company by returning
to the shareholders any paid-up share capital which in excess of the needs of the company. In this
subsection, if the company has excess funds and there is no likelihood that the company needs
the funds to continue with or to expand its business, the company may refund part of its capital
to its members. This can be seen in the case of Fowlers Vacola Manufacturing Co. Ltd. where
the directors of the company found that the company’s capital was in excess of its needs. A
special resolution was passed at a general meeting to reduce the capital of the company. The
petitioning preference shareholders opposed the reduction as by distributing the available capital
to ordinary shareholders at this instance was reducing the common fund which might have been
available to them at liquidation. Little J. in his judgement had stated that the preference
shareholders did not even had the opportunity to express their views, or give their assent at a
separate meeting even though it is not required to do so by looking at the articles of association.
Furthermore, he stated that the proposed return of capital to the ordinary shareholders and not to
the preference shareholders was not fair and equitable thus, the confirmation of the reduction of
capital should be refused.
 c. Supported by a solvency statement*singru

Section 113(3) of the CA 2016 defines the solvency statement as a statement that
each director making the statement has formed the opinion that the company satisfies the
solvency test in relation to the transaction. Section 113(2)(a) of the CA 2016 required the
directors to make a statement on the solvency status of the company before entering the
transaction of reducing share capital. Before the directors make a solvency statement,
Section 112 of the CA 2016 stated that a company has to satisfy the solvency test in
relation to the transaction of the reducing share capital and there are three requirements
that need to be fulfilled. Section 112(1) of the CA 2016 prescribed the requirements for
satisfying the solvency test which are first, there is no ground on which the company
could be found to be unable to pay its debts immediately after the transaction. Second, if
the company intends to commence winding up within 12 months after the transaction,
then the company is able to pay its debts in full within 12 months after the
commencement of the winding up. In the event that the company does not intend to
commence winding up proceedings within 12 months after the transaction, then the
company is able to pay its debts as the debts become due during the 12 months period
after the transaction. Third, the assets of the company are more than its liabilities by the
date of the transaction. Thus, the directors need to fulfill all the requirements stated under
Section 112(1) of the CA 2016 to satisfy the solvency test before making a solvency
statement.

As prescribed under the Section 113(2)(a) of the CA 2016, required all the directors are
required to make the statement in regards to the transaction of reducing share capital.
Section 113(1) stated that tThe solvency statement shall contain the date of the statement
and the name of the director who made the statement. The solvency statement will then
need to be signed by each director making the statement, and supported by a declaration
that the directors have made an inquiry into the affairs of the company. ]

There are few requirements of the solvency statement which is prescribed in the Section
113(1) of the CA 2016. Section 113(1)(b) stated that the said statement must contain the
date of the date of the statement and the name of the director who made the statement
whereas Section 113(1)(c) stated that the said statement must be signed by each director
making the statement and supported by a declaration to the effect that the directors have
made an inquiry into the affairs of the company. *repeat yg atas punya, either u guna ni
sambung selepas first sentence atau nak terus guna yg atas tu pun boleh
 Besides that, the steps for forming an opinion of making a solvency statement are
further prescribed in the Section 113(4) of the CA 2016. Firstly, the director shall inquire
into the company’s state of affairs and prospects and take into account all the liabilities of
the company including contingent liabilities. After that, the director will form the opinion
that the company satisfies the solvency test in relation to the transaction. Lastly, the
director will declare that he has made an inquiry into the affairs of the company and signs
the solvency statement. Section 114 of the CA 2016 further justifies that the director who
makes the solvency statement must also have reasonable grounds for the opinion
expressed, otherwise the said director is said to be committing an offence which will be
liable to a maximum of five years imprisonment or fine of maximum RM500,000 or both.
Hence, it can be concluded that the solvency statement with reasonable grounds for the
opinion expressed must be made by the director before entering the transaction of
reducing its company’s capital.

According to the Section 112(1) of the CA 2016, a company has to satisfy the
solvency test in relation to the transaction of the reducing share capital and there are three
conditions that need to be fulfilled. First, there is no ground on which the company could
be found to be unable to pay its debts immediately after the transaction. Second, if the
company intends to commence winding up within 12 months after the transaction, then
the company is able to pay its debts in full within 12 months after the commencement of
the winding up. In the event that the company does not intend to commence winding up
proceedings within 12 months after the transaction, then the company is able to pay its
debts as the debts become due during the 12 months period after the transaction. Third,
the assets of the company are more than its liabilities by the date of the transaction.

In short, the directors who sign the solvency statement must conduct the solvency
test as of the date of the statement. In the event that there is an intention to wind up the
company, then the directors must project the company’s financials for more than 24
months which is from the date of solvency statement to date of transaction, the date of
transaction to date of commencement of winding and 12 months after commencement of
winding up. On the flipside, when there is no intention to wind up the company, then the
directors must project the company’s financials for a shorter period that is from the date
of the solvency statement to the date of the transaction and 12 months from date of
transaction.

CONCLUSION:
 In conclusion, the strength of the current case of Alhambra Sdn Bhd lies in the fact that
the special resolution passed on 20 February 2022, is legally valid. This is because it aligns with
the requirements within Section 292 of the Company Act 2016. However, in order for the
requirement of reduction of share capital to be fulfilled, it must be coupled either with
confirmation by the court as per Section 154 or by solvency statement as per Section 113(2) of
the Act. Since none of the aforementioned is made, the likelihood of Alhambra Sdn Bhd in
succeeding the motion in court is unachievable.