Capital Reduction

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By Boo Kok Chuon

Share capital of a company may be altered subjected to certain conditions as provided in the Companies Act and the Companies’ articles or constitutions. In the current context, let us examine how companies can reduce their share capital.

In general, there are 2 types of share capital:

  1. Paid-up share capital; and
  2. Unpaid share capital.

Paid-up shares are shares that have been ‘paid’, either in cash and its equivalence or in other forms of valuable considerations. Unpaid shares refer to shares that are not fully paid, or even not paid at all. When shares are issued to the shareholder, but not paid, the company has the right to claim against the shareholder for the unpaid monies.

In general, there are three ways to reduce share capital of a company as provided by the Companies Act:

  1. Extinguishing or reducing a member’s liability to pay the amount of unpaid capital on his shares;
  2. Cancelling any paid-up capital which is lost or unrepresented by assets;
  3. Returning to shareholders any paid-up capital which is in excess of the needs of the company

There are many reasons why a company would want to reduce its share capital:

  • Return surplus capital to shareholders which it no longer need.
  • Absence of profits to be distributed as dividends.
  • Corporate or capital restructuring.
  • Maintain sufficient distributable funds for dividend payments.

In general, there are 2 methods to obtain approval for share capital reduction:

  1. The court-approved method; and
  2. Non-court approved method

1. The court-approved method

For a successful court-approved capital reduction, the company need to procure:

  1. Special resolution from members passed through EGM; and
  2. Court Order for the capital reduction

A notice to ACRA must be lodged to declare that the special resolution has been passed. Creditors consent to the reduction must be procured, thereafter the Court may approve the resolution if it is satisfied that the debt is safeguarded or secured.

Once the Court’s approval has been obtained, the Company will have to lodge with ACRA the relevant documents within 90 days of the approval.

The capital reduction will only be effective when ACRA records the lodged information.

2. The non-court-approved method

For a successful non-court approved capital reduction, the Company need to procure:

  1. A shareholders’ special resolution;
  2. A solvency statement by the Board of Directors (if applicable); and
  3. Compliance with the publicity requirements

Solvency statement

The solvency statement is a declaration of the Board of Directors to declare that the company is presently capable of servicing its debts for the next 12 months and solvent. Even in the event, it goes into liquidation, the value of its assets would exceed that of its liabilities.

Due care and diligence must be exercised when the directors make such a statement, where the financial position of the company must also be prudently considered. Inadequate justification may land the director in criminal liability.

The solvency statement can be made up to 20 days before the date of the special resolution for reducing share capital.

If the reduction exercise does not involve reduction or distribution of assets or discharge of liabilities, the solvency statement may not be required

The company must lodge with ACRA within 8 days from the date of the resolution so as to satisfy the publicity requirement:

  • A notice containing the text of the special resolution for reducing share capital;
  • The resolution date; and
  • The reduction information

The information lodged will be made available for public inspection for up to 1 month after the reduction if the application is successful.

Creditors’ objection

There is a window of 6 weeks for creditors to apply to the Court if it objects the company’s application for a non-court approved capital reduction exercise.

The capital reduction order will be cancelled if the Court is satisfied that:

  • Any applicant creditor’s debt or claim is outstanding, and it has not been secured or safeguarded; and
  • It is necessary to secure or safeguard these debts or claims in view of the company’s remaining assets after the reduction

If there are any creditor objections present:

  1. As soon as possible, the company must give notice to ACRA of the creditor objection(s);
  2. The creditor objection(s) must be dismissed by the court; and
  3. The company must, within 15 days from the date of dismissal of the last creditor objection, lodge a solvency statement, a statement from the directors that all creditor objection(s) have been dismissed, the court order(s) dismissing the objection(s), and a notice containing the reduction information.

Generally, the court-approved method is preferred as it is more difficult for creditors to challenge such a decision.

There would also be a less potential liability on the part of the board of directors, as there is no need to make the declarations under the solvency statement.

On the other hand, the non-court approved method is cheaper and simpler. However, it is always recommended to engage in a professional as share reduction requires skills and professional know-hows.

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