CHAPTER SEVEN:SHARE CAPITAL VARIATION OF CLASS RIGHTS However, it is to be mentioned here that issuing shares ranking equally with

the existing shares does not amount to variation of class right under the English common law 1. In Bristle Aeroplane case, additional preference shares were issued with equal ranking to the existing preference shares. The court held that there has not been any variation of class right. In Greenhalgh v. Ardenae Cinemas Ltd.2, the company had 10s shares and 2s shares. Its article provided that the company can later divide the 10s shares into 2s shares. Later the company divided the existing 10s ordinary shares into 2s shares and one existing 2s preference shareholder protested against this subdivision saying there has been variation of class right and his voting right has been affected. The court held although his voting right has been affected but there has not been any variation of class right. PROCEDURE OF VARIATION OF CLASS RIGHT The class rights can be varied in accordance with the procedure provided in section 31(1) and Article 4 of Table A of Fourth Schedule of Companies Act 1965. Article 4 of Table A provides a procedure to be followed to vary class rights. The class rights can be varied by passing special resolution in the general meeting of that class. Three-fourths majority votes must be given by the members of that class present in the general meeting unless the resolution to vary class right will not be valid. STATUTORY PROTECTION AGAINST VARIATION Section 65(1) of Companies Act 1965 provides that any member of a class affected with the variation of class right may file a petition in the court to set aside the resolution with varies class right. Court may set aside the variation resolution if it unfairly prejudices the interest of shareholders in the class. RESTRICTION ON PURCHASE OF SHARES IN THE COMPANY A company cannot purchase shares of its own. This is a common law rule decided in Trevor v. Whithworth3. The decision in Trevor case has been accepted in Malaysia in Section 67(1) of the Companies Act. However, Section 67A (1) of Companies Act (Malaysia) provides that a public company with share capital can buy its own shares. So, section 67A (1) has made an exception to section 67(1) of Companies Act. A company cannot provide financial assistance to any person to buy shares in the company. This has been provided in section 67(1) of the Companies Act (Malaysia) which reads as follows: A company must not give any financial assistance for the purpose of a purchase by any person of any shares in the company or where the company is a subsidiary, in its holding company. In Chung Khiaw Bank Ltd v. Hotel Rasa Sayang Sdn Bhd (1990) 1 MSCLC 390, 392, a bank gave loan to a company to buy shares in a hotel. The Supreme Court of Malaysia held that the loan transaction was invalid. The court held that section 67(1) of Companies Act prohibits any financial assistance given directly or indirectly, with the object of dealing in the shares of a company. Note: It is not clear whether the person or company can buy shares from another company which is not his own company after taking loan from a company or a bank. MAINTENANCE AND REDUCTION OF CAPITAL Maintenance of capital means to take care of company capital properly. The company should invest the capital in profitable business so that it can earn profits for the company. A company cannot return capital to its shareholders if the creditors are affected. In Winkworth case, the court observed that a company should preserve its capital to pay off the loan to the creditors. REDUCTION OF CAPITAL Normally, a company is not allowed to reduce its capital under English common law. However, section 64 of the Companies Act (Malaysia) has modified the English law position. This section allows reduction of capital if the company has capital in excess of the needs of the company. In that situation, it may decide to reduce capital by returning a part of the paid up capital as provided in section 64 of the Companies Act. Example, a company has 50,000 fully paid up shares, per share value is RM 10. It may decide to return RM 5 from each fully paid share to its shareholders. So, the company can reduce 50, 000 x 5 = RM 250, 000 capital. This was decided in Bristol Aeroplane case and Greenhalgh v. Ardenae Cinemas Ltd. [1946] 1 All ER 512. 2 [1946] 1 All ER 512. 3 (1887) 12 App Cas 409.
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In Re Fowler case, the company was doing food canning business. It had nominal share value 10s per share. It decided to reduce per share value to 2s and decided to return 8s to the shareholders. Because, the company had surplus capital. Court approved the reduction of capital as it had surplus capital and the creditors would not be affected. GROUNDS FOR REDUCTION OF SHARE CAPITAL Section 64 of CA (Malaysia) provides that a company can reduce its share capital if it has excess capital which is not needed. This section also provides a procedure to be followed to reduce share capital. Two types of share capital of a company can be reduced, such as: i. To extinguish or reduce unpaid capital. ii. To pay off part of the fully paid capital when the company has capital in excess of the needs of the company. PROCEDURE OF REDUCTION OF SHARE CAPITAL To reduce share capital in a company specific procedure should be followed. The procedure to reduce share capital is that the articles of the company must allow the reduction of capital. If the articles of association has provision for reduction of capital, a special resolution should be passed in a general meeting to reduce the capital. After that, the resolution should be submitted to the High Court for its approval. When the High Court confirms the resolution, the company has to amend its memorandum to reduce share capital. OBJECTION TO THE REDUCTION OF SHARE CAPITAL Creditors of the company can object to the reduction of capital in a company. Because, they might be affected by the reduction. In Re Convalescent Services Ltd., the company decided to return half of fully paid up capital to its shareholders. The creditors of the company objected to this reduction saying that the company cannot pay the creditors if capital is returned.