Reduction of Share Capital

Generally a company is prohibited from

reducing its share capital.
Effect: reduce the assets that are available
for the creditors if companies goes into
liquidation.

Exception Sec 64

A company may reduce its shares by:

a)
Extinguish or reduce the liability on
any of its shares in respect of share
capital not paid up
b) Cancel any paid up capital which is lost
or unpresented by available assets;
c) Pay off any paid up share capital which is
in excess of the needs of the company.

Extinguish or reduce the liability on

any of its shares in respect of
share capital not paid up
Where company issued partly paid shares,
later the company no longer needed the
uncalled amount;
May carry out a reduction of capital by
cancelling the amount that is no longer
required.

Cancel any paid up capital which is lost

or unpresented by available assets

A company may lose money during its

trading & the amount shown as paid up
capital in a cos financial statement may no
longer reflect the value of assets.
Co may wish to cancel some of its capital so
that the balance sheet would gives more
accurate view of the companys financial
position.

Pay off any paid up share capital which is

in excess of the needs of the company

Re Fowlers Vacola Manufacturing Co

Ltd
Co sold a substantial part of its business
operations which resulted in excess capital to
members.

Procedure for reduction

sec 64 (1)
i.

ii.

iii.

Authorization from the articles Table Article

42
A special resolution in general meeting
and
Confirmation by the court (High court + by
way of petition)

Creditors rights sec 64 (2)

Sec 64 (2) (a) creditors entitled to object;

Sec 64 (2) (c) (i) & (ii) payment of

creditors debt

Court may order reduction

if:

The consent of the creditors who are

entitled to object has been obtained or

Their debts and claims have been

discharged determined or secured
sec 64 (4)

Case

Merchant Credit Pte Ltd v Industrial & Commercial

Realty Co. Ltd (1983)

A company limited by shares cannot return the

capital to the shareholders.
(1)the appellant company could not convert or agree to convert
their equity capital into a loan, conditionally or unconditionally
and repay the loan without reduction in capital which no
company could effect without the leave of the court;
(2)the appellant company had no power to rescind the contract
for shares and to return the application moneys as moneys
borrowed or as moneys had and received because an illegal
reduction of capital would thereby be involved;

Other reduction permitted

Sec 62 (1) (e), (2) cancellation of shares
not a reduction
Sec 61 redemption of redeemable
preference shares
Sec 60 (3) (e) & (f) application of share
premium account
Sec 181 (2) (c) court order

Is reduction variation?

Paying off preference shareholders depends

on whether the class rights would have
been affected upon winding up.

If what is proposed (reduction) is in

accordance with the class rights upon
winding up; there is no variation.

House of Fraser plc v ACGE

Investment Ltd
F: General meeting passed a special resolution
- paying off the preference share capital.
Preference shareholders; no class meeting
& court could not confirm.
HOL: The preference shareholders had a right
to a return of capital in priority to other
shareholders and that right was not
affected.

Re Northern Engineering
Industries plc
F: AOA- rights of any class were to be deemed
to be varied by the reduction of the capital
paid up on those shares. Co proposed
paying off its preference shares and
cancelling them.
COA: It was a reduction; there should be
separate class meeting.

Dividends

A company cannot use the funds or money

which it has raised from the shareholders to
pay dividends
Illegal return of capital to the shareholders
Fraud on the creditors as the company would be
less able to pay its debts.

Sec 365 (1)

No dividend shall be payable to the
shareholders of any company except out of
profits or pursuant to section 60 (sec 60 (3)
(c).
Art 100 of Table A.

Rights of a shareholders to
dividends

Conditional right
- depends on the existence of profits
- decision is a matter of internal
management

If declared debts owed by the company to

the shareholders;
Cannot be revoked, cancelled or reduced

Hilton International
- D should be paid out of profits
- No D; if co. insolvent or jeorpadize cos
balance sheet
Chip Thye Enterprise Pty Ltd
- Not justify to declare D when the co is
insolvent

Method of payment of dividends

By cash
By issue of fully paid up shares (bonus
shares) sec 60 (premium account)
Sec 67A (3B): treasury shares (share
dividend)

2 steps involved
Declaration of the dividend by competent
authority;
Payment

Who may declare

dividends
Company in general meeting, subject to the
amount recommended by the directors (Art
98)
Industrial Equity Ltd v Blackburn
- It is possible for the articles to vest the
power to declare dividends in the directors.

Available of profits

Marra Development Ltd

- Profits for payment of dividends need to be

available at the time the dividends are
declared and not necessary available when
the dividend is actually paid

Industrial Equity Ltd v

Blackburn
Profits belonging to a subsidiary could not be
applied for the payment of its holding

Effect of Contravention
Sec 365 (2) (a)
Every director or manager who permitted
the payment of such dividend would be
guilty;
Sec 365 (2) (b)
Directors maybe personally liable to
compensate the creditors.

Interim Dividends
Article 99
Its declaration does not create a debt
May revoke before payment.