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QUESTION 26 The rule in Trevor v Whitworth against self-purchase of shares by a company has been adopted and enforced by Section

67 of the Companies Act 1965 to ensure the maintenance of a company capital.

The prohibition on the company purchasing its own shares was first expressed by the House of Lords in 1887 in the classic case of Trevor v Whitworth (1887) 12 App Cas 409. In this case, the executor of Whitworth, a deceased shareholder in the company (James Schofield& Son Ltd.), sold his share in the company to it. Payment is to be made by two installments. Prior to the payment of the second installment the company went into the liquidation.The executors claimed this sum from the companys liquidator, Trevor. Whilst the companys memorandum did not authorize it to purchase its own share, its articles did. Held of the case, a company had no power to purchase its own shares even if its articles permitted such an acquisition. Hence, the purchase was void. Whitworths claim for the balance failed. The common law proposition that a company shall not purchase its own shares is reinforced by section 67 of the Act. The English case of Trevor v Whitworth (1887) 12 App Cas 409, was referred to and applied in Mookapillai & Anor v Liquidator, Sri Saringgit Sdn Bhd & Ors (1981) 2 MLJ 114. This application made under section 243 by the appellants. The effects of this application, if allowed, would have resulted in a substitution of the winding up order previously granted with the terms of agreement that have been reached between the majority and minority shareholder. The agreement was entered into 28 September 1979. It provided that in consideration for the minority shareholders supporting the above application the company in turn purchase the share of the minority shareholders for $ 1,260,910 and reduce the paid up share capital of the company. The company would raise the stipulated sum by mortgage of its assets. This application was denied and the appellants appealed to the Federal Court. The Federal Court dismissed the appeal. One of the reasons for its decision was that a company is not allowed to purchase its own shares as this way contrary to section 67. Further, what was proposed by the agreement also amounted to a reduction of the companys issued capital.

The rules against a company purchasing its own shares is not absolute and is therefore subject to the exceptions, in fact, section 67 provides inter alia, that except as is otherwise expressly provided by this Act no company shall purchase its own shares. The exceptions are first, where the exceptions set out in section 67(2) applies. Second, where a company redeems its redeemable preference share: section 61. Third, where the court makes an order for the company to purchase shares of the applicant: section 181(2) (c). Last, where a public listed company purchases its own shares through the KLSE: section 67 A. Contravention of the above prohibition shall result in the officers who approved the unlawful transaction, and not the company, being guilty of an offence against the Act: section 67 (3). Furthermore, section 67 (4) provides that officers who are convicted for the above offence would also be liable to pay composition to the company or any third party for any loss or damage suffered as a result of such a transaction if ordered so by the court. Next, under section 67 A, a public listed company if authorized by its articles can now apply to purchase its shares through the exchange rate. This in related to the permitted share buy-back under section 67 A. Where public listed company applies to purchase its shares as provided by section 67 A, the company (presumably its directors) must ensure that the company is the company is solvent at the date of the purchase and will not become insolvent by incurring the debts involve in the obligations to pay for the shares so purchased. In addition, the purchase is made through Stock Exchange on which the share of the company is quoted in accordance with the rules of the Stock Exchange. Further, the company must ensure that the purchase is made in good faith and in the interests of the company. In addition, to prohibiting the purchase of shares by a company, section 67 (1) further prohibits a company from giving direct or indirect financial assistance for the acquisition of its own shares. The prohibition against a company giving financial assistance to those who wish to purchase or subscribe to the shares of the company as provided by section 67, supports the proposition that those who wish to buy or subscribes for the shares of the company must do so entirely by using their own resources, for if it were otherwise, a company may dissipate its own assets and return capital to its members to the detriment of its creditors. In Datuk Tan Leng Teck v Sarjana Sdn Bhd & Ors (1997) 4 MLJ 329, Augustine Paul JC, referring to section 67, said that the object of the section is to ensure that the assets of a company are preserved and returned to the members directly and indirectly. The company also prohibited from giving direct and indirect financial assistance to a subsidiary

company to acquire the shares of its holding company and lending money on the security of its own shares; or dealing in its own shares. However, the rule in section 67(1) of the Act is not without exceptions. They are provided by the statute itself. Thus in section 67(2) it provides some situations where the prohibition imposed by section 67(1) will not apply. The first one is section 67(2)(a) which is lending of money by a company whose ordinary business is to lend money and the lending is in the ordinary course of its business. Next, the provision of money by a company for the purchase of or subscription for fully paid shares in the company accordance with a scheme, by trustees for shares to be held by or for the benefit of employees of the company: section 67(2)(b). Under this exception, a director who is an employee may also enjoy the benefit of this exception. Last but not least, based on section 67(2)(c), the giving of financial assistance by a company to persons, other than directors, for the purchase of fully paid shares in the company or holding company to be held by themselves by way of beneficial ownership. Moreover, section 67(3) saves a company from being found guilty of the offence against the rule of prohibition that contained in section 67(1), notwithstanding the general penalty provisions contained in section 369 of the Act. Further, by section 67 (4), on a person being convicted of an offence under section 67(3) would also be liable to pay compensation to the company or any third party for any loss or damage suffered as a result of the breach of the prohibition. By virtue section 67(5), the court is enabled, in exercise of its powers under section 354, to relieve a person to whom that section applies, wholly or partly and on such terms as the court thinks fit, from a liability referred to in that section to have such and order made against him.

QUESTION 48 a. Explain with the aid of case law, the extent to which the right of a member to transfer his shares in a company may be restricted? (80 marks )

Share is defined under Section 4 of the Companies Act 1965 which means share in the share capital of a corporation and include stock except where the distinction between stock and shares is expressed or implied. Under Section 98 of the Companies Act 1965, a share is transferable in the manner provided by the Articles Of Association (AOA) of that company.

Transfer means the transfer of legal title to shares; equitable ownership may be transferred without the necessity of changing the register of members. Shares are transferred by execution and delivery of a proper instrument of transfer to the company.

According to Section 6A (9) (c) of the Companies Act 1965 - a company may not register the transfer of shares unless such instrument is delivered to it. Shares are freely transferable unless restrictions are imposed by the memorandum or articles.

In the case of Lim Ow Goik v Sungei Merah Bus Co Ltd (1969) 2 MLJ 101. The second appellant had sold his shares to the first appellant and sends a notice to the directors. The directors later inform the second appellant that his application to dispose his shares to the first appellant could not be approved but it could be considered for approval provided he gave the pre-emption right equally to all the existing shareholders. The article of association of the company provide that the directors may decline to register any transfer of shares to a person of whom they do not approve and may decline to register any shares in which the company has a lien. The decision was first, the directors had exercised their powers for a reason not empowered by the articles of the company. Therefore, this was an improper exercise by the directors of the powers vested in them. The second decision was the second applicant had the right in favour of his claim and the court must give effect to it by ordering the company to register the transfer.

The transfer of shares are commonly done by: a. Giving a discretion to the directors to refuse to register a transfer; or b. By stipulating to whom shares may be transferred; or c. by giving to the existing members a right to have any shares offered to them before they can be transferred ( right of pre-emption) Where discretion is given to the board of directors to refuse to register a transfer, this power must be exercised bona fide in the interest of the company and not for any collateral purpose.

In the case of Kesar Singh v Sepang Omnibus Co Ltd (1964) MLJ 122. Where directors of a company are given by the articles of association an absolute and uncontrolled discretion with regard to registering a transfer of shares the only limitation on the directors discretion is that it should be exercised bona fide in the interest of the company. Once the directors have stated on oath that they have exercised their discretion unless the contrary is establish by the deponents by establishing a substantive case showing that the discretion has been wrongly exercised. If a company refuses to register a transfer by reason of a discretion conferred upon the directors, a notice stating the facts which are considered to justify refusal must be served on the applicant for transfer within one month of the date the application is made. This is illustrated under Section 105 of the Companies Act 1965. Where the directors have given reasons for the refusal to register a transfer, the court may evaluate the sufficiency of those reasons. The company may decline to register a transfer if any of the requirements contained in the articles regarding transfer of shares is not satisfied. The power to refuse to transfer shares must be exercised within a reasonable time; otherwise the right of refusal may be lost.

David Hey New Kok Ann Realty Sdn Bhd (1985) 1 MLJ 167 The appellant had obtained a transfer to himself in the Respondent Company. The board of directors of the company had declined to register the transfer. The appellant applied for rectification of the register of members of the company. The directors in refusing to register the transfer had not exercised their discretion reasonably and in good faith and their

discretion have been lost by unreasonable delay because they took three and half months to send notice of refusal to him contrary to the requirement of Section 105 of the Companies Act 1965. One of the delay of refusal is to obtain the approval of the Foreign Investment Committee in accordance with the guidelines for Regulations of Assets, Mergers and Take-over and Mergers. The decision was that in this case it was decided that noncompliance with the requirements of guideline obviously have adverse consequences especially to a private company such as respondent company so that the exercise of the discretion by the directors in refusing to rectify the register was in the circumstances something the learned trail judge rightly declined from interfering with. A transfer of shares in breach of the share transfer restrictions may be set aside i.e. a transfer in breach of rights of pre-emption is invalid. Such purported transfer is void and will confer no rights upon the transferee.

In Gan Chit Tuan v Chew Kian Kor (1958)MLJ 62 The Court of Appeal held that a sale of shares without complying with an article restricting the right of transfer was void. The majority of the court also held that the abortive sale did not transfer any legal title to the purchaser. Thomson CJ who dissented, felt that the concluded contract of sale constituted the purchaser as beneficial owner. In principle, the decision of Thomson CJ seems preferable, for the non-compliance with the restrictive article merely precludes the purchaser from acquiring legal title, it does not affect hid equitable rights. He cannot insist on being registered as holder, but there seems to be no reason why the vendor should not hold the shares for him as a trustee.

b. Explain the difference between transfer and transmission of shares. (20 marks)

Transfer of Shares Transfer of Shares means transferring the shares on the name of some other person on a voluntary basis. i. ii. iii. iv. v. vi. The transfer-or and transferee takes initiative. Nature of Action is a deliberate action taken by a shareholder. There are two parties i.e. transfer-or and transferee to the transfer of shares. An instrument of transfer has to be duly executed by the transfer-or and transferee. Stamp Duty is payable on the market value of shares. Right of Refuse: The directors of the company can refuse transfer of shares on certain grounds. vii. Consideration: There must be an adequate consideration for the transfer of shares, unless they are transferred by way of gift.

Transmission of Shares Transmission of shares means the passing of property or title in shares by the operation of law from a member to his legal representative on the happening of a certain event like death, insolvency or lunacy. Transmission of shares takes place in case of death, insolvency or insanity of members of the company. In case of transmission of shares, there is no need to fill the Transfer Deed.

The legal heir of the deceased share holder takes the initiative. i. It is not deliberate action of a shareholder, but the result of operation of law, after he dies or becomes insane or bankrupt. ii. iii. The legal heir of the deceased shareholder is involved. Certain documents like court order of insolvency, death certificate are required for transmission of shares. iv. v. No stamp duty is payable for transmission of shares. Transmission of shares can't be refused; it is under operation of law.

vi.

Consideration: The question of consideration does not arise in the case of transmission of shares, as it is due to the operation of law.

QUESTION 78 (b) Explain what is meant by deferred share, ordinary share and preference share. (40 marks) Preference shares Preference shares are shares which gives certain preferential rights on their holders. The rights relating to preference shares are set out in the companys contribution. They may vary from one company to another. Usually, preference shareholders have a priority right over ordinary shareholders to get a return of their capital if the company winds up. Preference shares also do not have a right to vote. Preference shares are assumed to carry a right to cumulative dividends. This means that if the company does not pay the full dividend on preference shares in any year the preference shareholder will be entitled to have the amount of the deficiency made up in a later year before any dividend is paid on ordinary shares. (Webb v Earle)

Deferred shares Deferred shares are shares that have fewer rights in some way than ordinary shares. The rights are often restricted to such an extent as (deliberately) to make the shares worthless, this happens in the course of a capital restructuring and such deferred shares are usually eventually cancelled. The ways in which deferred shares have lesser rights can ordinary shares include that they do not have any voting rights and rank lower for repayment of capital in the event of winding up. Dividends may also not be paid until a certain date and they also will not be paid until all other classes of shares have been paid. In general, deferred can mean the opposite of preferred, but the variations possible mean that it is not really an exact opposite. (Petersz G.) Ordinary shares Ordinary shares are any shares that are not preferred shares and do not have any predetermined dividend amounts. An ordinary share represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company.

Ordinary shareholders are entitled to receive dividends if any are available after dividends on preferred shares are paid. They are also entitled to their share of the residual economic value of the company upon the event of winding up but they are last in line after bondholders and preferred shareholders for receiving business proceeds. As such, ordinary shareholders are considered unsecured creditors. Also known as "common stock".

References: i. ii. H A J Ford, Principles of Company Law 2nd Edition, Publisher: Butterworths A K Iftikhar, S Zura Maznum, General Principle of Partnership and Company Law in Malaysia, Publisher: Ilmiah Publishers iii. iv. W Walter, Company Law 2nd Edition, Publisher: Sweet and Maxwell Asia Publisher Rachagan. S, Principle of Company Law in Malaysia, (2002)

LAW 485 ASSIGNMENT 1

PREPARED BY: NOR FASHILA BINTI OMAR SAKINAH BINTI ABDULLAH HAKIM NABILAH SYAHIRAH BINTI ZULKARNAIN SHAHIDA AZLIN BINTI SHAMSUDIN RODIATUL ADAWIYAH BINTI HASSAN FATIN NADIA BINTI FADZIL CLASS: AC220 5A 2011826784 2011881436 2011285168 2011210948 2011213302 2011289314

PREPARED TO: Pn. Noor Jahan Mohd Ali

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