UUUK 3063: COMPANY LAW II

TUTORIAL PRESENTATION WRITTEN SUBMISSION

QUESTION 4

PREPARED FOR:
PROF. DR. HASANI MOHD. ALI

PREPARED BY:

NAME MATRICS NO

MINNIE CHEW MEE RU A167571

NURUL FARZANA BINTI MOHD AMIN A167611

MOHD AL-SAIFEE AZIZ BIN AZMAN A168029

UMMI NAJWA BINTI MOHD ZANI A169090

ADIB HANNANI BINTI MD YATIM A169687

NIK SARAH ADILAH BINTI ABDUL AZIZ A169695

Question 4

Syarikat Gerenti Untung Bhd (the company) refers to Schedules 3 and 4 of the Companies
Act 1965 as their memorandum and articles of association.

The Company has submitted the following proposals: -

a. offer A shares worth RM2.00 at a rate of RM1.00 by increasing the sale of A share units
from 1000 to 2000 units.

b. proposes to reduce the dividend rate on share B (which has a fixed dividend rate compared
to other shares) from 10% to 7%

c. redeems any paid-up capital of the company deemed to exceed the requirements of the
company.

Debab owns 55% of the B share class and has come to see you and object to all the above
proposals. He is also the largest holder of class B shares. Meanwhile, Bank Ta’jadhi, a major
creditor, was not happy with the company’s move to approve the proposal.

Advise Debab and Bank Ta’jadhi on their position and rights in law in relation to the above
recommendations.
1.0 Question A

The company proposes to offer A shares worth RM2.00 at a rate of RM1.00 by

increasing the sale of A share units from 1000 to 2000 units. According to section 2,
Companies Act 2016, shares means issued share capital of a corporation. A share is share
capital, ordinary shares.

In accordance with rights and powers attached to shares, section 71(1)(b) and section
71(1)(c) Companies Act 2016 is referred to. Stated in section 71(1)(b), a share in a company
other than preference shares, confers on the holder the right to vote on a show of hands on
any resolution of the company. In addition in section 71(1)(c), having a share in a company
gives the holder the right to one vote for each share on a poll on any resolution of the
company.

Share capital of a company can be altered and this is provided in section 84

Companies Act 2016. Specifically stated in section 84(1)(a) a company may alter its share
capital by passing a special resolution to consolidate and divide all or any of its share capital
unless otherwise provided in the constitution. Also provided in section 84(1)(c), a company
can alter its share capital by subdividing its shares. In the above situation, the proposal made
involves the alteration of share capital.

Is there a variation of class rights in proposal (a)?

In terms of company law, variation of class rights can be defined as changes made to a
certain class of share that affects its rights and enjoyment.

According to Companies Act 2016, section 91 provides for the variation of class
rights. Section 91(1) states that the variation of the rights shares in a company may be varied
only in accordance with the constitution provided in section 91(1)(a) or with the consent of
shareholders in that class provided in section 91(1)(b). Section 91(2) explains that the consent
of the shareholders shall be a written consent representing not less than seventy five per
centum of the total voting rights of the shareholders in the class or a special resolution passed
by shareholders in the class sanctioning the variation. Shareholders have to be notified of the
variation, as provided in section 92(1) Companies Act 2016.
 It is a common law principle that a mere corporate action against any class of share
does not immediately amount to a variation unless the act has changed the rights attached to
the shares.

In the case of Greenhalgh v Arderne Cinemas Ltd [1946], where Arderne Cinemas
Ltd had issued two ordinary shares which is first, that is valued at 10 shillings per and
second, that is valued at 2 shillings per share. Every member has one vote for each share. The
company articles provided the holders of each class of shares with one vote per share, and
stated the company had power to subdivide its existing shares. A resolution was passed to
subdivide each of the 10 shilling shares. The shareholders of the 2 shilling shares argued that
the voting rights were varied without their consent.

The court dismissed the claim, because his voting rights were not varied as he had the
same voting rights that he had before because he held 2 shilling shares after the variation. The
articles of the company were duly complied, because of the right to have one vote per share
pari passu (on equal footing) is maintained. Hence, it is a principle that there will be no
variation of rights if the rights attached to a class of shares remain exactly the same.

Lastly, in the case of Crumpton v Morrine Hall [1965], where a shareholder of a

certain class of share filed for an injunction to prohibit the company from making changes via
a resolution without her consent. The company has different classes of shares, and the
company argued that the changes had not varied the plaintiff’s right attached to her share.
The court held the company’s resolution did varied the plaintiff’s right. It was defined that a
class of shares is a group of shares sharing the same rights. If two shares have the same
rights, they are in the same class regardless whether the constitution names the shares as
being in two different classes. If they have different rights, they are of different classes of
shares.

In application, the proposal in (a) does not amount to a variation of class rights.
Although the act of increasing share A’s units from one thousand to two thousand units
increased the number of votes of that share, the number of votes per share remains the same,
which is one vote per one share. The number of votes are parri passu, that is on equal footing
with the original state of share A before the proposal was executed. Following Greenhalgh’s
case, there is no variation to share A because the rights attached to that share remain exactly
the same as they were before a corporate action was taken. Hence, the increase in the number
of share units does not amount to a variation if the rights attached to it are not changed.
 For Debab’s, if proposal (a) varied the rights in share A, Debab’s right attached in
share B is not affected. This is because Debab is in a different class of shares. Since share A
is an ordinary share while share B is a preference share because of a fixed dividend rate, there
are of different classes of share. Applying the principles in Crumpton’s case, any change in
the rights of a class of share will not affect the right of another class of share that is different
from it. Thus, should there be any variation to share A, it does not need Debab’s consent.

However, as a member of the said company, Debab and share B can still be varied if
proposal (a) expressly affects their rights. This may be done through the articles of the
company as provided in section 91(1)(a) and 91(1)(b). Furthermore, Debab’s consent must be
in an express written form that is representing not less than seventy five percent of the total
voting rights of the shareholders of share B, or a special resolution is passed sanctioning the
variation based on section 91(2). As per section 92(1), Debab and share B’s shareholders
must be notified in the case of a variation of the share capital.

2.0 Question B

The issue under this question is whether Debab and Bank Ta’jadhi have legal rights
upon the proposal that the company proposes to reduce the dividend rate on share B (which
has a fixed dividend rate compared to other shares) from 10% to 7%?

The question exhibits Share B as preference share. In general, the different classes of
shares can be categorised into ordinary shares and preference shares. ‘Preference shares’ is
defined in Section 2(1) CA 2016 as a share which does not entitle the holder to 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.
Therefore in other words, the holder of preference share may not have the right to vote or to
participate in any distribution of dividend or surplus asset upon the company’s winding up.
Moreover, the shares provide dividend payments to shareholders. The payments can be fixed
or floating, based on an interest rate benchmark. In the case of Re SQ Wong Holdings (PTE)
LTD [1987] 2 MLJ 298, it was suggested that preference shares carry preferential rights in
relation to ordinary shares (unless otherwise prescribed) in respect of dividend on a
cumulative basis and return of capital on winding up. Besides, preference shares are granted
voting rights only to the degree that their rights are or become influenced by the company's
financial state or the actions of other shareholders.

The rights of the holder of preference shares in the company’s constitution are
protected under Section 90(4) CA 2016. According to this section, the rights of holders of
preference shares shall be stipulated in the constitution with respect to: (1) repayment of
capital, (2) participation in surplus assets and profits, (3) cumulative or non-cumulative
dividends, (4) voting, (5) priority of payment of capital and dividend in relation to other
shares or other classes of preference shares. A company’s constitution is a contract between
the company and members, and between the members, thus the holders' rights are protected
and cannot be disputed by the other members. For instance, in the case of Bestino Group
Berhad v Chong Yuk Ming & Ors [2019] MLJU 1591, the plaintiff company had failed to
pay the promised return of 36% dividend per annum. The judge delivered his verdict that the
dividend is payable by the Plaintiff company if there is a profit, according to the rights related
to the preference shares. It is also the Plaintiff company that has the right to redeem the whole
or any part of the preference shares for the time being issued after one year from the date of
allotment and issue of such preference shares.

The company proposal to reduce the dividend rate on share B which has fixed
dividend rate from 10% to 7% is a variation of class rights in which a reference must be made
to both Companies Act 2016 and the constitution of the company. Section 91(1)(a) CA 2016
provides that the rights attached to a class of shares may be varied in accordance with the
constitution for the variation of those rights. In the present case, the constitution of Syarikat
Gerenti Untung Bhd constitution via Item 4 of the Fourth Schedule of the Companies Act
1965 provides that the rights attached to any class may be varied with the consent in writing
of the holders of three-fourths of the issued shares of that class, or with the sanction of a
special resolution passed at a separate general meeting of the holders. Hence, the company
has two options which is (i) to pass the proposal on reduction of the dividend rate either by
obtaining a written consent from Class B shareholders or (ii) by passing a special resolution
on this matter in a meeting with the B class shareholders.

In regards to the meeting to pass the special resolution on the variation of class rights
for Share B holders, a class meeting must be held pursuant to Section 339 of the Companies
Act 2016. A class meeting is a meeting of only a certain class of members and is called when
there is a proposition to vary the rights attached to the class of shares. Accordingly, Section
339(6)(a) provides that any amendment to the constitution affecting the rights attached to a
class of shares are insertion of any such provisions relating to variation or the rise of a class
of members are treated as a variation of class rights. Hence, the company proposal to reduce
the fixed dividend rate on share B class must be passed through the class meeting. In addition
to that, any holder of the shares in the class that present may demand a poll to decide on the
present matter according to Section 399(7) CA 2016.

In this situation, Syarikat Gerenti Untung Sdn Bhd has the rights to reduce the fixed
dividend rate by the power vested under Section 91(1)(a) CA 2016. In which, the variation
can also be done pursuant to Item 4, Schedule 4 of Memorandum & Article of Association of
the company. Furthermore, the proposal on the reduction of dividend rate may be passed in
the class meeting under Section 339 of the Companies Act 2016. Debab, as a major
shareholder who owns 55% of class B shares, may demand a poll in the class meeting and
oppose the reduction of the fixed dividend rate. In regards to the creditor, Bank Ta’jadhi
cannot interfere in this matter as the bank does not hold any Class B shares.

3.0 Question C

The issue is whether Debab and Bank Ta’jadhi have legal right upon the proposal
submitted by Syarikat Gerenti Untung Bhd to redeem paid-up capital deemed to exceed the
requirements of the company.

Paid-up capital is the amount of money a company has been paid from shareholders in
exchange for shares of its stock e.g. ordinary or preference shares. Paid-up capital is when the
nominal (par) value of share capital is actually issued and paid-up by the members. So fully
paid-up shares are when the members have fully paid-up on the shares that were paid par
value of the shares. Preference share in this situation may be redeemed by the company again
according to the prescribed conditions in section 72(4) of the Company Act 2016, where it
provides that the shares shall be redeemable only if the shares are fully paid up and the
redemption shall be out of (a) profits; (b) a fresh issue of shares; or (c)capital of the company.
Furthermore, preference shares may also be redeemed through share buyback for a public
listed company.
 In accordance to section 72(6) of Company Act 2016, it provides that the redemption
of shares out of the capital referred to in paragraph 4(c) shall only be redeemed subject to the
following (a) solvency statement made by all directors under section 113 in relation to such
redemption; and (b) a copy of the solvency statement with the Registrar lodged by the
company. Furthermore, according to section 112(1) of the Company Act 2016, for the
purpose of redemption of preference share, a company needs to satisfy the solvency test. The
solvency test includes a few requirements which are first, immediately after the transaction,
the company is not unable to pay its debt. Second, the company can pay its debts in full
within 12 months after the transaction and lastly, the asset is more than the liability at the date
of the transaction. Lastly, section 72(7) of Company Act 2016 stated that the company shall
give notice to the Registrar specifying the shares redeemed within fourteen days from the
redemption.

By relating to the current case, Debab is the preference shareholder for fully paid-up
capital from Syarikat Gerenti Untung Bhd. Thus, when the company made a proposal to
redeem the paid-up capital, it is in accordance with section 72(4) whereby it stated that
preference share shall be redeemable and it will be paid up in terms of profits, new shares or
capital from Syarikat Gerenti Untung Bhd. The redemption may be done after the company
gave a copy of the solvency statement with the Registrar. The notice given by Syarikat
Gerenti Untung Bhd must include the details of shares to be redeemed 14 days before
redemption is made.

Other than that, as previously mentioned, paid-up capital may be redeemed through
share buyback only if the company is a public listed company (plc). The reason being, under
common law, it originally prohibits a company from returning its capital to its members
which also includes repurchasing shares from its own members. This was stated in the case of
Trevor v Whitworth [1887] whereby the action mentioned is prohibited and was codified
under section 123(1)(b) of the Companies Act 2016. However, PLC is allowed to buy back
its shares if it fulfills section 127 of the Act.

Under section 127 of Company Act 2016, there are several requirements that must be
fulfilled in order for PLC to be able to purchase back their own shares. In this situation
Syarikat Gerenti Untung Bhd as a PLC shall fulfill requirements such as (i)their constitution
allows or gives the company authority to buy back its shares, (ii) Syarikat Gerenti Untung
Bhd at the time of purchase must be solvent, (iii)the purchase of the shares shall be done
through Bursa Malaysia not through private sale, (iv) the buy back must follow Bursa
Malaysia Listing Requirements and lastly (v) the purchase for share buy back must be done
in good faith and for the interest of Syarikat Gerenti Untung Bhd.

Syarikat Gerenti Untung Bhd also refers to Schedules 3 and 4 of the Companies Act
1965 as their memorandum and articles of association. Based on Item 5 of Third Schedule of
the Company Act 1965, it is regarding power of a company where it may take, or otherwise
acquire, and hold, shares, debentures, or other securities of any other company. On the other
hand, Item 3 of Fourth schedule of Company Act 1965 concerns about the regulations for
management of a company limited by shares where it mentions that subject to the Act, any
preference shares may, with the sanction of an ordinary resolution, be issued on the terms that
they are, or at the option of the company are liable, to be redeemed.

In the case of Ex Parte Westburn Sugar Refineries Ltd [1951], the court held that it
must consider the interests of the stakeholders of the company, namely, its creditors, members
and the public. Other than that, section 90(4) of the Company Act 2016 provides that the
constitution shall set out the rights of the shareholders with respect to repayment of capital,
participation in surplus assets and profits, cumulative or non-cumulative dividends, voting
and priority of payment of capital and dividend in relation to other shares or other classes of
preference shares. On the other hand, creditors may invoke section 118 of the Company Act
2016 concerning the proposal. This section provides the creditor’s right to object to the
reduction of the share capital by the company. Subsection (2) provides that any creditor of the
company may apply to the Court for the resolution to be cancelled within six weeks from the
date of the resolution. In subsection (4) it mentions that when an application is made under
subsection (2), the creditor shall as soon as possible serve the application on the company and
the company shall as soon as possible give the Registrar notice of the application. Next, as
the court is satisfied with the application by the creditor, the proposal may be cancelled in
accordance with section 120 of Company Act 2016.

Based on the AOA of Syarikat Gerenti Untung Bhd and provision in Company Act
2016 previously mentioned, the preference share issued by the company shall be redeemable.
However, Debab and Bank Ta’jadhi have a say in the proposal made by Syarikat Gerenti
Untung Sdn Bhd because it is as per mentioned in the case of Ex Parte Westburn Sugar
Refineries where it must consider the interests of the members and creditors. In this case,
Debab is the major shareholder while Bank Ta’jadhi is the major creditor. Hence, the
redemption of the paid up capital shall consider Debab’s voting and Bank Ta’jadhi’s interest.
In addition, section 90(4) of Company Act provides that the shareholders have the right of
voting for matters concerning shares. Meanwhile, Bank Ta’jhadi may also object to the
proposal by using their rights provided under section 118 of Company Act and their right
shall be prioritized before any proposal can be passed. To conclude, both Debab and Bank
Ta’jadhi may object to the proposal submitted by Syarikat Gerenti Untung Bhd concerning
the redemption of the paid up capital.

4.0 Conclusion

In conclusion, Debab and Bank Ta’jadhi have no legal positions in proposal (a) as
Debab holds shares B meanwhile proposal (a) relates with shares A. In proposal (b), Debab
has legal positions as a preference shareholder to object to the proposal made by the company
to reduce the fixed dividend rate however, Bank Ta’jadhi as the creditor, has no legal
positions at all to disagree. In proposal (c), Debab and Bank Ta’jadhi both have legal
positions thus redemption of the paid up capital shall consider Debab’s voting and Bank
Ta’jadhi’s interest.
REFERENCES

STATUTES
Companies Act 1965
Companies Act 2016

CASES
Bestino Group Berhad v Chong Yuk Ming & Ors [2019] MLJU 1591
Crumpton v Morrine Hall [1965] NSWR 240
Ex Parte Westburn Sugar Refineries Ltd [1951] AC 625
Greenhalgh v Arderne Cinemas Ltd (No 2) [1946] 1 All ER 512
Re SQ Wong Holdings (PTE) LTD [1987] 2 MLJ 298
White v Bristol Aeroplane [1953] 2 WLR 144

BOOKS
Chan Wai Meng. 2017. Essential Company Law in Malaysia:Navigating the Companies Act
2016. Sweet & Maxwell Asia.
Cheah Foo Seng. 2017. The Annotated Malaysian Companies Act 2016. Thomson Reuters
Malaysia Sdn Bhd.

ARTICLES
ACCA Global. Malaysian Companies Act 2016: an overview.
https://www.accaglobal.com/an/en/student/exam-support-resources/fundamentals-exa
ms-study-resources/f4/technical-articles/mys-comp-act.html. [27 May 2021]
Chen J. Paid-Up Capital. https://www.investopedia.com/terms/p/paidupcapital.asp
[27 May 2021]
Deloitte. Reform in the Malaysian Corporate Landscape: Key Highlights under the New
Companies Act.
https://www2.deloitte.com/content/dam/Deloitte/my/Documents/tax/my-tax-espresso-
reform-in-the-malaysian-corporate-landscape.pdf. [27 May 2021]