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.
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.

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.
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.
Re Fowlers Vacola Manufacturing Co Ltd
Co sold a substantial part of its business
operations which resulted in excess capital to
members.
i. Authorization from the articles Table Article
42
ii. A special resolution in general meeting and
iii. Confirmation by the court (High court + by
way of petition)
Sec 64 (2) (a) creditors entitled to object;

Sec 64 (2) (c) (i) & (ii) payment of creditors
debt
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)
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;

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
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.
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.
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.


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.
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.
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
By cash
By issue of fully paid up shares (bonus
shares) sec 60 (premium account)
Sec 67A (3B): treasury shares (share dividend)
Declaration of the dividend by competent
authority;
Payment
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.
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
Profits belonging to a subsidiary could not be
applied for the payment of its holding
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.
Article 99
Its declaration does not create a debt
May revoke before payment.