Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).

Capital reduction refers to the repayment of capital to the shareholder of the company by decreasing its share capital through the cancellation of shares. The objectives for companies undertaking capital reduction are as follows:

1. to return surplus capital to shareholder(s);
2. to manage the liability or losses;
3. to establish a reserve for dividend payment; or
4. to change the capital structure.

In Malaysia, a capital reduction must be approved by a special resolution via either confirmation by the Court under Section 116 of the CA 2016 or a solvency statement under Section 117 of the CA 2016. However, companies must first ensure that their Constitution allows for capital reduction. If such authority is not present, amendment to its Constitution must first be made.

1. Confirmation by Court
   
   The method of capital reduction by Court confirmation is more just and equitable than the solvency statement method. The responsibility of the Court in the exercise of capital reduction is to ensure the interests of all parties involved such as creditors, shareholders and the public are considered and safeguarded before the Court’s confirmation on the proposed capital reduction.
   
   With the Court’s confirmation, the company’s directors may propose the capital reduction in all or any of the following ways to secure shareholders’ approval through a special resolution:
   

   (1)	eliminating or reducing the liability on any unpaid share capital of the company;
   (2)	cancelling the paid-up share capital that is no longer available or of value to the company; and/or
   (3)	returning the surplus capital to the shareholder(s).

   
   The Court will make an order confirming the capital reduction if the Court is satisfied that every creditor entitled to object, has consented to the capital reduction or his debt or claim has been fully settled. The company will then need to lodge the Court order with the Registrar for the Registrar to issue a notice confirming the capital reduction. This will serve as the absolute indication that all requirements for capital reduction have been met and that the share capital of the company is as specified in the Court order.
   
   
2. Solvency Statement
   
   The capital reduction backed by a solvency statement is a swift and cheaper method. In this method, all the directors of the company are required to issue a solvency statement. However, in the case of capital reduction by way of cancellation of paid-up share capital which is lost or unrepresented by available assets, the company will not be required to meet the solvency requirements. This method of capital reduction would impose a higher risk of offences and liabilities on the directors in relation to the solvency statement. Futhermore, the creditors of the company have the right to submit an objection to the capital reduction within 6 weeks from the date of the special resolution.
   
   A capital reduction could be performed when a company passed a directors’ resolution to satisfy the solvency test and all directors sign a solvency statement and recommend the proposed capital reduction for shareholders’ approval via special resolution. The solvency statement must be made within 14 days ending with the date of the special resolution for private company. Within 7 days after the passing of the special resolution, the company is required to proceed with the followings:
   

   (1)	advertise the notice of the capital reduction in widely disseminated newspapers in Malaysia in both the national language (i.e. Bahasa Malaysia) and English.
   (2)	submit a copy of the notice of capital reduction to the Companies Commission of Malaysia (CCM) and Inland Revenue Board (IRB) respectively.

   
   Provided there is no objection received from the creditors after the end of the 6 weeks from the date of the special resolution, the company shall lodge the following to the CCM on or before the end of 8 weeks from the date of special resolution:
   
   

   (1)	a copy the resolution;
   (2)	a copy of the solvency statement;
   (3)	a statement by the directors confirming that the notice of capital reduction had been sent to IRB and CCM, the company able to meet the solvency requirements and that no objection from creditors; and
   (4)	a copy of the advertised notice of capital reduction.

   
   Once the Registrar has reviewed the application, a notice confirming the capital reduction which is the conclusive evidence of the capital reduction will be issued.
   
   
3. Conclusion
   
   The CA 2016 requires companies to strictly follow procedures during the capital reduction exercise. Hence, companies must thoroughly assess the proposed capital reduction in terms of legal, financial, strategic, and obligation factors to ensure the interests of all parties involved are considered and safeguarded.
   
   

Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.