SINGAPORE MANAGEMENT UNIVERSITY / COMPANY LAW LGST 201

Seminar 9 – Company Finance: Increasing, Altering & Reducing Share Capital

Reading:
Pearlie Koh, Chapter 12 [12.14] to [12.74], OR
Yeo & Lee, Chapter 17 (from § 17-400 onwards)

1. Introduction

In this topic the critical issue to be addressed is: what are the appropriate conditions
for a company to return share capital to its shareholders? In answering this question,
the law has to balance a number of important and potentially conflicting concerns:

 on the one hand, there is the concern that creditors and minority shareholders
might be disadvantaged if shareholders could too freely recover their
investments from the company.

 on the other hand, shareholders have a legitimate right to be allowed to reap

the return on their investments from time to time. In addition, too restrictive a
legal regime may stifle the company’s ability to manage its capital and finances
efficiently. These concerns are particularly real where the company is doing
well and fully solvent.

In recent years there have been many changes in company law to “liberalise” the
capital maintenance rules. These changes are motivated mainly by the desire to give
companies more freedom to organize their capital efficiently without jeopardizing the
interests of creditors and minority shareholders. You should pay attention to the
specific ways in which the rules are designed to safeguard these latter interests.

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2. Capital Maintenance Rule 

— Under this basic principle, a company is generally prohibited from returning capital
and assets to shareholders whilst the company is a going concern except (i) in the
form of dividends or (ii) in accordance with procedures permitted under the
Companies Act.

— In understanding the Capital Maintenance rule, note that it affects both the share
capital itself and assets representing that capital (i.e., both sides of the balance
sheet). Thus, unless an exception applies, a company may not:

(a) cancel its shares (which would lead to the repayment of the assets
corresponding to those shares), or

(b) return (i.e. repay) to shareholders assets representing shares, even if those
shares are not cancelled.

Subject to this (and with the exception of the rules on Financial Assistance), the
rule does not affect how the company’s assets are used. This must surely be the
case, because the very reason for investing money in a company is to allow the
company to use the money in its business operations and (hopefully) generate
profits.

— What then, is the rationale of the Capital Maintenance rule? It is intended primarily
for the protection of the company’s creditors and minority shareholders. A creditor
who lends money to a company does so on the basis that the money will be used
for the company’s business operations (and not for the purpose of enabling the
shareholders to realise their investment). The creditor also assumes, rightly, that
should the company fail, he will be paid before the company’s shareholders. Thus,
it would be unfair to the creditor if the company’s shareholders are allowed to
recover their investment (i.e., capital) prior to the creditors being paid, thereby
increasing the creditors’ risk at the time of the company’s insolvency. Similarly,
insufficient restrictions on capital maintenance could harm minority shareholders.
If, for instance, the majority shareholders could cause the company to return part
of the capital to themselves (and not to the minority), this would offend the
principle that all shareholders rank equally, and the minority shareholders would
face greater risk of non-recovery when the company is insolvent.

— In the following sections, we will consider the various prohibitions embodied in the
rule as well as the exceptions to it. Although the basic principle has not been
abolished, the number and scope of the exceptions to it have grown over the years
to a point where the doctrine has lost much of its practical importance – \
especially, in Singapore, after the 2005 amendments. The trend of law reform here,
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 as in other countries, has been towards substituting a different standard (that of
solvency) to protect creditors when companies return assets to shareholders.

3. Dividends 

This is by far the most common and simple means of returning profits to
shareholders.

o Distribution may only be made out of profits – s 403(1)

403. Dividends payable from profits only

(1) No dividend shall be payable to the share-holders of any company except out of
profits.
(1A) Subject to subsection (1B), any profits of a company applied towards the
purchase or acquisition of its own shares in accordance with sections 76B to 76G
shall not be payable as dividends to the shareholders of the company.
(1B) Subsection (1A) shall not apply to any part of the proceeds received by the
company as consideration for the sale or disposal of treasury shares which the
company has applied towards the profits of the company.
(1C) Any gains derived by the company from the sale or disposal of treasury shares
shall not be payable as dividends to the shareholders of the company.
(2) Every director or chief executive officer of a company who wilfully pays or
permits to be paid any dividend in contravention of this section —
(a) shall, without prejudice to any other liability, be guilty of an offence and
shall be liable on conviction to a fine not exceeding $5,000 or to
imprisonment for a term not exceeding 12 months; and
(b) shall also be liable to the creditors of the company for the amount of the
debts due by the company to them respectively to the extent by which the
dividends so paid have exceeded the profits and such amount may be
recovered by the creditors or the liquidator suing on behalf of the creditors.
(3) If the whole amount is recovered from one director or chief executive officer he
may recover contribution against any other person liable who has directed or
consented to such payment.
(4) No liability by this section imposed on any person shall on the death of such
person extend or pass to his executors or administrators nor shall the estate of any
such person after his decease be made liable under this section.
(5) In this section, “dividend” includes bonus and payment by way of bonus.

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 o Availability of profits determined at the time of declaration. Profits need only
be available at the time of the declaration and NOT time of payment. Once the
dividend is declared, the declaration of dividend creates a debt owing to its
members and cannot be revoked. (Marra Developments Ltd v BW Rolfe Pty Ltd)

o Mode of payment: in cash or in scrip (i.e. bonus issue)

o What is the distinction between final and interim dividends?

o Definition of “profits”? The current position is that that dividends may be

declared out of current revenue profits even if the company’s accumulated
losses exceed such revenue profits. This rule has been the subject of much
debate.

o Dividends must be declared from the profits of the company only, not any
other legal entity (Industrial Equity v Blackburn)

o Can profits arising from the re-sale of Treasury shares be used for purposes of
dividends?

The following example illustrates the operation of subsections (1A), (1B) and (1C):
Example: A company utilises $1 of profits to purchase one share for $1, and
subsequently resells it for $3. Since the company utilised $1 of profits to purchase
the share, the profits available for dividend payment will be reduced by $1
(subsection (1A)).
Upon resale of the share for $3, the $2 gained by the company from the resale
cannot be used for dividend payment (subsection (1C)), but the balance of $1 from
the proceeds of the resale may be applied towards the $1 of profits that the
company originally utilised to purchase the share and, if so applied, may be used for
dividend payment (subsection (1B)).
~ Explanation Statement to the Companies Amendment Bill 2005

o Effects of contravention – s 403(2)

~ Criminal offence
~ Liability to creditors

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4. Share Buy-Backs

o As mentioned, a company cannot return any assets to its members while it is a

going concern (except in the form of dividends if there are available profits). In the
case of a company limited by shares, the obligation of a member is limited to the
amount unpaid on the shares of such a member. As these members enjoy limited
liability, the law ensures that the share capital of the company is not reduced to
the prejudice of its creditors as the capital of the company is meant to be used to
pay creditors in the event of winding up. Thus, the general rule is that a company is
prohibited from purchasing its own shares (otherwise known as a share repurchase
or buy-back), as this would reduce the assets available for distribution to creditors
upon its winding up.

o s 76(1A) (which codifies the common-law prohibition established in Trevor v

Whitworth (1887)) states that:

76. Company financing dealings in its shares, etc.

(1A) Except as otherwise expressly provided by this Act, a company shall not —
(a) whether directly or indirectly, in any way —
(i) acquire shares or units of shares in the company; or
(ii) purport to acquire shares or units of shares in a holding company or
ultimate holding company, as the case may be, of the company; or
(c) whether directly or indirectly, in any way, lend money on the security of —
(i) shares or units of shares in the company; or
(ii) shares or units of shares in a holding company or ultimate holding
company, as the case may be, of the company.

o The prohibition in s 76(1A)(a) extends to

~ the purchase of shares in a company’s holding company, see s 76(1A)(a)(ii).
Why?

o Effects of contravention:
ii. Company officer may be guilty of offence, s 76(5)
~ may be liable to compensate company or other persons who suffer loss, s
76(6)
iii. Transaction is void, s 76A(1)(a)
~ Note, however, the exception as regards listed shares, s 130M. This is for
reasons of convenience.

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o Exceptions to the general prohibition – buy-backs under ss 76B – 76G
 Since 1987, the prohibition against share buy-backs is no longer absolute. A
company may now repurchase its shares in the ways permitted under ss 76B –
76G. Further, since 2006 a company can pay for a buy-back out of share capital.
 Rationale for change – to provide a more flexible equity structure- a more
‘direct and efficient’ means of returning capital to shareholders.
 Reasons for effecting share buy-backs:
1. to facilitate fund-raising by small businesses
2. to return excess liquidity to shareholders
3. enhance earnings per share
4. provide ‘signals’ on market value

○ Methods for permitted share buy-backs

a. Off-Market Equal Access: s 76C
~ an offer to buy the same percentage of shares from all shareholders of the
same class on the same terms
b. Selective Off-Market Acquisition: s 76D
~ purchase from specified shareholders pursuant to an agreement approved
by the company by way of special resolution
c. Contingent Purchase Contract: s 76DA
~ a contract under which a company does not agree to purchase shares
outright but only upon the occurrence of certain contingent events
d. Market Acquisition: s 76E
~ where the company repurchases its own shares from the market. This
method is only appropriate for companies whose shares are listed on the
stock exchange.

○ Safeguards for creditors and shareholders

 For creditors:
~ A company may only repurchase its own shares if the company is solvent, s
76F(1).

 Against abuse or manipulation by company

~ Must be authorised by Articles
~ Shareholders’ approval (type of resolution depends on buy-back method)
~ Buy-back is subject to a maximum of 20% of issued share capital in any
period between 2 consecutive AGMs (current SGX limit: 10%) (Meaning of
“relevant period” –period commencing from last AGM (or when it was
required to be held) before the resolution in question is passed, and
expiring on the date the next AGM is or is required by law to be held,
whichever is the earlier, after the date the resolution in question is passed)
~ Disclosure

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○ Consequences of contravention of solvency requirement

 If a company purchases its own shares at a time when it is not solvent, then the
purchase of shares is not lawful ~ s 76(F)(2)

 Who would be responsible if a company effects a share buy-back transaction

out of capital while the company is not solvent?

76F(3) CA
Every director or manager of a company who approves or authorises, the purchase
or acquisition of the company’s own shares or the release of obligations, knowing
that the company is not solvent shall, without prejudice to any other liability, be
guilty of an offence and shall be liable on conviction to a fine not exceeding
$100,000 or to imprisonment for a term not exceeding 3 years.

o Treasury Shares

A company that purchases its own shares may decide either (a) to cancel the
shares that have been bought back, or (b) to keep these shares in existence as
treasury shares.

 What is the effect on a company’s (a) share capital and (b) profits if a company
should decide to cancel the shares bought back? ~ s 76G

76G. Reduction of capital or profits or both on cancellation of repurchased shares

(1) Where under section 76C, 76D, 76DA or 76E, shares of a company are
purchased or acquired, and cancelled under section 76B(5), the company shall
—
(a) reduce the amount of its share capital where the shares were purchased or
acquired out of the capital of the company;
(b) reduce the amount of its profits where the shares were purchased or
acquired out of the profits of the company; or
(c) reduce the amount of its share capital and profits proportionately where
the shares were purchased or acquired out of both the capital and the
profits of the company,
by the total amount of the purchase price paid by the company for the shares
cancelled.
(2) For the purpose of subsection (1), the total amount of the purchase price
referred to in that subsection shall include any expenses (including brokerage or
commission) incurred directly in the purchase or acquisition of the shares of a
company which is paid out of the company’s capital or profits under section

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 76F(1).

 Who “owns” treasury shares? ~ s 76H(2)

76H. Treasury shares

(1) Where ordinary shares or stocks are purchased or otherwise acquired by a
company in accordance with sections 76B to 76G, the company may —
(a) hold the shares or stocks (or any of them); or
(b) deal with any of them, at any time, in accordance with section 76K.
(2) Where ordinary shares or stocks are held under subsection (1)(a) then, for the
purposes of section 190 (Register and index of members) and section 196A
(Electronic register of members), the company shall be entered in the register
as the member holding those shares or stocks.

 What is the maximum amount of shares that can be held as treasury shares at
any one time? ~ s 76I

76I. Treasury shares: maximum holdings

(1) Where a company has shares of only one class, the aggregate number of shares
held as treasury shares shall not at any time exceed 10% of the total number of
shares of the company at that time.
(2) Where the share capital of a company is divided into shares of different classes,
the aggregate number of the shares of any class held as treasury shares shall not
at any time exceed 10% of the total number of the shares in that class at that
time.
(3) Where subsection (1) or (2) is contravened by a company, the company shall
dispose of or cancel the excess shares in accordance with section 76K before the
end of the period of 6 months beginning with the day on which that
contravention occurs, or such further period as the Registrar may allow.
(4) In subsection (3), “the excess shares” means such number of the shares, held by
the company as treasury shares at the time in question, as resulted in the limit
being exceeded.
 Is the holder of treasury shares entitled to voting and dividend rights? ~ s 76J

76J. Treasury shares: voting and other rights

(1) This section shall apply to shares which are held by a company as treasury
shares.
(2) The company shall not exercise any right in respect of the treasury shares and
any purported exercise of such a right is void.
(3) The rights to which subsection (2) applies include any right to attend or vote at
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 meetings (including meetings under section 210) and for the purposes of this
Act, the company shall be treated as having no right to vote and the treasury
shares shall be treated as having no voting rights.
(4) No dividend may be paid, and no other distribution (whether in cash or
otherwise) of the company’s assets (including any distribution of assets to
members on a winding up) may be made, to the company in respect of the
treasury shares.
(5) Nothing in this section is to be taken as preventing —
(a) an allotment of shares as fully paid bonus shares in respect of the treasury
shares; or
(b) the subdivision or consolidation of any treasury share into treasury shares of
a greater or smaller number, if the total value of the treasury shares after
the subdivision or consolidation is the same as the total value of the
treasury share before the subdivision or consolidation, as the case may be.
(6) Any shares allotted as fully paid bonus shares in respect of the treasury shares
shall be treated for the purposes of this Act as if they were purchased by the
company at the time they were allotted, in circumstances in which section 76H
applied.

 In what ways can the holder of treasury shares deal with such shares? ~ s 76K

5. Redemption of Redeemable Preference Shares (“RPS”) – s 70 CA

70. Redeemable preference shares

(1) Subject to this section, a company having a share capital may, if so authorised by its
constitution, issue preference shares which are, or at the option of the company are
to be, liable to be redeemed and the redemption shall be effected only on such
terms and in such manner as is provided by the constitution.
(2) [Deleted by Act 36 of 2014 wef 01/07/2015]
(3) The shares shall not be redeemed unless they are fully paid up.
(4) The shares shall not be redeemed out of the capital of the company unless —
(a) all the directors have made a solvency statement in relation to such
redemption; and
(b) the company has lodged a copy of the statement with the Registrar.
(5) For the avoidance of doubt, shares redeemed out of proceeds of a fresh issue of
shares issued for the purpose of redemption shall not be treated as having been
redeemed out of the capital of the company.
(6) A private company may redeem any redeemable preference shares by lodging a
prescribed notice of redemption with the Registrar.
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 (7) A redemption of any redeemable preference shares by a private company on or
after the date of commencement of section 36 of the Companies (Amendment) Act
2014 does not take effect until the electronic register of members of the company is
updated by the Registrar under section 196A(5).
(8) If a public company redeems any redeemable preference shares, it shall within 14
days after doing so give notice thereof to the Registrar specifying the shares
redeemed.

o Economically, RPS are a hybrid form of investment straddling both loan and equity
– but are shares for legal purposes. RPS are preference shares with a “buy back”
option, meaning the company may buy back the preference shares from the holder
at a fixed price, either at the option of the holder or of the company.
o Issue of RPS must be authorised by articles
o Restrictions on redemption:
i. only in the manner set out in Articles
ii. redemption may be made out of profits or (since 2006) out of capital; but if the
redemption is paid out of capital, the directors are required to sign a solvency
statement (defined in s 7A): see Part 9, below.

6. Authorised Capital Reduction 

Apart from doing a dividend distribution or share buyback, a company considering

a return of excess cash to its shareholders may also consider doing a capital
reduction exercise under the Singapore Companies Act.

A company may opt to return cash to its shareholders by way of capital reduction if
it does not have distributable profits and some companies may even take on
additional debt to fund the cash distribution. A company may, however, also opt
for capital reduction even if it has distributable profits if it wishes to improve its
capital structure or leave distributable reserves intact to maintain a sustainable
dividend policy post-capital reduction. Unlike a share buyback, which any
shareholder may choose not to accept, a capital reduction will, once passed by the
requisite 75 percent shareholder majority, be binding on all shareholders and
ensure a more definitive outcome for companies which are doing so primarily to
improve their capital structure. Capital reductions are also not subject to the 10
percent statutory limit applicable to share buybacks.

A company may effect a capital reduction by obtaining the requisite shareholder

approval, followed either by the approval of the High Court or a ‘court-free’
process which requires each director of the company to make a solvency
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 statement. In practice, directors may be reluctant to provide solvency statements
as they are required to vouch for the company’s ability to pay off its debts for a
period of 12 months following the capital reduction exercise. If a director provides
an erroneous solvency statement without reasonable grounds, he may be subject
to criminal liability that includes financial penalties and/or imprisonment. As such,
most companies in Singapore still prefer the ‘court sanction’ route.

To summarise:

 Any reduction of capital must be authorized by a special resolution and the

company must in general meet solvency requirements – see sections 78B
and 78C. Creditors may pursuant to section 78D object to the reduction and
if there are any such objections the court will cancel the reduction if the
court is satisfied that the creditors’ claims have not been secured or they
are insufficient safeguards for such claims, and it is not the case that such
security or safeguards are unnecessary – see section 78F of the Act. If there
are no objections from creditors the share reduction will take effect upon
certain formalities being complied with and no order of court is required –
see section 78E(1) and (2).
 A reduction of capital is also possible by way of special resolution subject to
court approval. In such cases the capital reduction does not take effect until
it receives approval by an order of court – see section 78G.

Method 1: Court Sanction route

A limited company may reduce its share capital with the approval of the High
Court following a special resolution of shareholders (ss 78G – 78I). The court’s
role is to ensure that creditors are not prejudiced by the capital reduction.

78G. Reduction by special resolution subject to Court approval

(1) A company limited by shares may, as an alternative to reducing its share capital
under section 78B or 78C, reduce it in any way by a special resolution approved
by an order of the Court under section 78I, but the resolution and the reduction
of the share capital shall not take effect until —
(a) that order has been made;
(b) the company has complied with section 78I(3) (lodgment of information with
Registrar); and
(c) the Registrar has recorded the information lodged with him under section
78I(3) in the appropriate register.
(2) [Deleted by Act 36 of 2014 wef 01/07/2015]

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 78H. Creditor protection
(1) This section shall apply if a company makes an application under section 78G(1)
and the proposed reduction of share capital involves either —
(a) a reduction of liability in respect of unpaid share capital; or
(b) the payment to a shareholder of any paid-up share capital,
and also applies if the Court so directs in any other case where a company makes an
application under that section.
(2) Upon the application to the Court, the Court shall settle a list of qualifying
creditors.
(3) If the proposed reduction of share capital involves either —
(a) a reduction of liability in respect of unpaid share capital; or
(b) the payment to a shareholder of any paid-up share capital,
the Court may, if having regard to any special circumstances of the case it thinks it
appropriate to do so, direct that any class or classes of creditors shall not be
qualifying creditors.
(4) For the purpose of settling the list of qualifying creditors, the Court —
(a) shall ascertain, as far as possible without requiring an application from any
creditor, the names of qualifying creditors and the nature and amount of
their debts or claims; and
(b) may publish notices fixing a day or days within which creditors not included
in the list are to claim to be so included or are to be excluded from the list.
(5) Any officer of the company who —
(a) intentionally conceals the name of a qualifying creditor;
(b) intentionally misrepresents the nature or amount of the debt or claim of
any creditor; or
(c) aids, abets or is privy to any such concealment or misrepresentation,
shall be guilty of an offence and shall be liable on conviction to a fine not exceeding
$15,000 or to imprisonment for a term not exceeding 3 years.
(6) In this section and section 78I but subject to subsection (3), “qualifying creditor”
means a creditor of the company who, at a date fixed by the Court, is entitled to
any debt or claim which, if that date were the commencement of the winding
up of the company, would be admissible in proof against the company.

78I. Court order approving reduction

(1) On an application by a company under section 78G(1), the Court may, subject to
subsection (2), make an order approving the reduction in share capital
unconditionally or on such terms and conditions as it thinks fit.
(2) If, at the time the Court considers the application, there is a qualifying creditor
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 within the meaning of section 78H —
(a) who is included in the Court’s list of qualifying creditors under that section;
and
(b) whose claim has not been terminated or whose debt has not been
discharged,
the Court must not make an order approving the reduction unless satisfied, as
respects each qualifying creditor, that —
(i) he has consented to the reduction;
(ii) his debt or claim has been secured or he has other adequate safeguards
for it; or
(iii) security or other safeguards are unnecessary in view of the assets the
company would have after the reduction.
(3) Where an order is made under this section approving a company’s reduction in
share capital, the company shall (for the reduction to take effect) lodge with the
Registrar —
(a) a copy of the order; and
(b) a notice containing the reduction information,
within 90 days beginning with the date the order is made, or within such longer
period as the Registrar may, on the application of the company and on receiving the
prescribed fee, allow.

o Under the traditional court-approved procedure, what does the court take into
account in deciding whether or not to sanction a capital reduction? – s 78I

The Court in allowing a capital reduction in the Court Sanction route will
require proof that all qualifying creditors of the client have either:
(a) consented to the reduction;
(b) their debts or claims secured or safeguarded; or
(c) no longer require security or safeguards in view of assets the company will
have after the reduction.
In reality, many companies adopting the Court Sanction Route will try to obtain
sanction the basis of (c), or (b), because:
 most companies seeking to reduce capital tend to still have excess assets
after reduction sufficient to meet the requirements of (c) or (b), and/or
 creditor consent in (a) may in reality be difficult to obtain if the creditor
profiles are complex or if the creditors are voluminous. This is especially so
because the statute seems to expressly require a positive consent to be
given from each qualifying creditor.
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 o As for who might be a “qualifying creditor” under s 78H, the comparator being
used is that of a winding up of the company. The term "qualifying creditor" is
defined in s 78H(6) as "a creditor of the company who, at a date fixed by the
Court, is entitled to any debt or claim which, if that date were the
commencement of the winding up of the company, would be admissible in
proof against the company".
In a winding up of a company Singapore, provable debts do not just refer to
liquidated sums of money due and owing as at the time of the commencement
of winding up, but also include contingent debts/liabilities, which are claims
that are not payable but are admissible as a proof for something which may
ripen into a right for present payment.
Even if there are “qualifying creditors”, the Court can still allow the capital
reduction if (i) said creditors consent to the reduction; (ii) said creditors debt or
claim has been secured or said creditor has other adequate safeguards for it; or
(iii) the Court deems security or other safeguards to be unnecessary in view of
the assets the company would have after the reduction.

Method 2: Shareholder Resolution route

Since 2006, a new alternative procedure for such reductions has been available
(s 78B for private companies, and s 78C for public companies) under which a
company which meets a solvency test does not need court approval to reduce
its capital.
If the company has many creditors and/or the consent of these creditors is
difficult to obtain, it could be better for the company to consider the
Shareholder Resolution route instead of the Court Sanction route. Although the
downsides to this include the risk to directors arising from the solvency
statements, this approach may be more practical because the onus is on the
creditors to object and file for cancellation with the Court within this 6-week
period. Should no objection be filed, the capital reduction may proceed. Should
there be any such objection filed, however, it would still be for the company to
show to the Court that:
(a) the debts or claims have been secured or the company has other adequate
safeguards for them, or
(b) security or other safeguards are unnecessary in view of the assets that the
company would have after the reduction.

78B. Reduction of share capital by private company

(1) A private company limited by shares may reduce its share capital in any way by
a special resolution if the company —
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 (a) [Deleted by Act 36 of 2014 wef 01/07/2015]
(b) meets the solvency requirements; and
(c) meets such publicity requirements as may be prescribed by the Minister,
but the resolution and the reduction of the share capital shall take effect only as
provided by section 78E.
(2) Notwithstanding subsection (1), the company need not meet the solvency
requirements if the reduction of share capital does not involve any of the
following:
(a) a reduction or distribution of cash or other assets by the company;
(b) a release of any liability owed to the company.
(3) For the purposes of subsection (1), the company meets the solvency
requirements if —
(a) all the directors of the company make a solvency statement in relation to
the reduction of capital; and
(b) the statement is made —
(i) in time for subsection (4)(a) to be complied with; but
(ii) not before the beginning of the period of 20 days ending with the
resolution date.
(4) Unless subsection (2) applies, the company —
(a) shall —
(i) if the resolution for reducing share capital is a special resolution to
be passed by written means under section 184A, ensure that every
copy of the resolution served under section 183(3A) or 184C(1) (as
the case may be) is accompanied by a copy of the solvency
statement; or
(ii) if the resolution is a special resolution to be passed in a general
meeting, throughout that meeting make the solvency statement or
a copy of it available for inspection by the members at that meeting;
and
(b) shall, throughout the 6 weeks beginning with the resolution date, make the
solvency statement or a copy of it available at the company’s registered
office for inspection free of charge by any creditor of the company.
(5) The resolution does not become invalid by virtue only of a contravention of
subsection (4), but every officer of the company who is in default shall be guilty
of an offence.
(6) Any requirement under subsection (4)(b) ceases if the resolution is revoked.

Sample timeline for Shareholder Resolution route

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 Day Item Relevant
provision

Day 1 Directors make Solvency Statement Section 78B(3)

Day 6 (last 14-day Notice to shareholders of general meeting at Section 78B(4)(b)

day) which special resolution is to be passed, must be given

Day 20 (last Special Resolution approving capital reduction of the Section 78B(3)(b)
day) Company (solvency statement or copies of it must be (ii)
made available for inspection by members at meeting)
· Solvency statement or copies of it must be
made available at the company’s registered
office for inspection by creditors, free of charge,
for a period of 6-weeks after date of resolution

Day 28 (last Company must lodge with Registrar: Reg 6 of

day) · Notice containing the text of the special Companies
resolution for reducing share capital; Regulations
· Date of the Resolution;
· Reduction information
Company may also wish to publish a notice containing
the reduction information in a daily Singapore
newspaper

6 weeks Period for creditors to object to the capital reduction by Section 78D
following Day applying to the Court for the resolution to be cancelled.
20 · Copies of the application(s), if any, will be
served on the company as soon as possible

6-8 weeks Copies of the following must be lodged with the Section 78E
following Day Registrar:
20 · The special resolution that was passed;
or · Statement by the company’s directors
15 days from confirming that the necessary solvency and
date last publicity requirements have been complied
application to with, and that applications to object were either
object is not brought or have been brought to an end (as
resolved the case may be);
· A notice containing the reduction information.

Consider the following questions in relation to authorised capital reductions:

o In what circumstances may a company reduce its share capital? s 78A

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 78A. Preliminary
(1) A company may reduce its share capital under the provisions of this Division in
any way and, in particular, do all or any of the following:
(a) extinguish or reduce the liability on any of its shares in respect of share
capital not paid up;
(b) cancel any paid-up share capital which is lost or unrepresented by available
assets;
(c) return to shareholders any paid-up share capital which is more than it
needs.
(2) A company may not reduce its share capital in any way except by a procedure
provided for it by the provisions of this Division.
(3) A company’s constitution may exclude or restrict any power to reduce share
capital conferred on the company by this Division.
(4) In this Division —
“reduction information”, in relation to a proposed reduction of share capital by a
special resolution of a company, means the following information:
(a) the amount of the company’s share capital that is thereby reduced; and
(b) the number of shares that are thereby cancelled;
“resolution date”, in relation to a resolution, means the date when the resolution is
passed.
(5) This Division shall not apply to an unlimited company, and shall not preclude
such a company from reducing in any way its share capital.
(5A) This Division shall not apply to any redemption of preference shares issued by
a company under section 70(1) which results in a reduction in the company’s share
capital.
(6) This Division shall not apply to the purchase or acquisition or proposed purchase
or acquisition by a company of its own shares in accordance with sections 76B to
76G.

o What sort of transactions would amount to share capital reduction?

o Transactions which are exempt from the rules applicable to reductions of

capital:
(a) s 71(1)(e) (cancellation of shares not taken up, or forfeited)
(b) ss 76B to 76G (share buy-backs)
(c) s 76K(4) cancellation of Treasury shares

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 o Under the alternative court-free procedures (ss 78B & 78C), the court no longer
plays the role of a watchdog for creditors, the burden essentially rests on
management. Fairness amongst members is also a matter for shareholders to
determine. A special resolution plus a solvency statement will be needed.

o Given that only a 75% majority is required under ss 78B & 78C – is there scope
for oppression of minority shareholders in such a system? Presumably s 216
should be the answer to that.

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7. Financial Assistance for Acquisition of Own Shares – ss 76(1) & 76A 

Introduction

o s 76(1) prohibits a company giving any financial assistance, whether directly or

indirectly, for the acquisition of shares in the company or in its holding
company.
This prohibition is different from the other aspects of the Capital Maintenance
rule we have looked at above, because a company’s capital is not immediately
affected when it lends money to others to buy shares in itself. Why, then, is
this regarded as a Capital Maintenance rule?
It is often said that a central objective of this rule is to prevent the company’s
assets from being depleted. In extreme cases, a company’s cash is being used
to help a prospective shareholder acquire a controlling stake in the company,
and this controlling shareholder might then exercise its votes to strip the
company of its assets. However, there are some cases in which the financial
assistance given by the company seems legitimate. In practice, it is often not
easy to tell whether a transaction has fallen foul of the prohibition in s 76(1), or
is a legitimate one which should not be impeached. The great length and
drafting complexity of ss 76 and 76A do not help.

Wu Yang Construction v Mao Yong Hui

“The provision was enacted to prevent abuses in the form of persons or syndicates
indirectly using the funds of the target company to acquire control of the target
company by, first, obtaining bank loans to finance their purchase of the target
company, and then, after gaining control of the target company, using the target
company's funds to repay those bank loans… …Such practices might deplete the
assets of the target company and thereby offend the rule on capital maintenance,
which protects the interests of creditors.”

Recent reform

o The 2014 Act made significant changes to the rules on financial assistance by:

 removing the ban altogether from most private companies, but not from
public companies or their subsidiaries; and

 introducing yet another exemption from the ban (see below).

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 Scope of the prohibition

76. Company financing dealings in its shares, etc.

(1) Except as otherwise expressly provided by this Act, a public company or a
company whose holding company or ultimate holding company is a public
company shall not, whether directly or indirectly, give any financial assistance for
the purpose of, or in connection with —

(a) the acquisition by any person, whether before or at the same time as the
giving of financial assistance, of —

(i) shares … in the company; or

(ii) shares … in a holding company or ultimate holding

company, as the case may be, of the company; or

(b) the proposed acquisition by any person of —

(i) shares … in the company; or

(ii) shares … in a holding company or ultimate holding

company, as the case may be, of the company.

o Note the three components of the prohibition in s 76(1):

i. the giving of financial assistance by a relevant company

ii. for the purpose of (or in connection with)
iii. the acquisition of shares in the company or its holding company

o What amounts to “Financial Assistance”? s 76(2)

 Loans
 Guarantees or other security for a loan
 Release of a debt or other obligation owing to the company
- on the rationale that this might result in a lower price payable for the
purchase of shares (eg, EH Dey Pty Ltd v Dey [1966] VR 464)

EH Dey Pty Ltd v Dey [1966] VR 464

Facts:
Dey was a shareholder of EH Dey Pty Ltd, and owed a sum of money to the
company for the shares which he had taken but had not fully paid for. Mr
and Mrs Paul wanted to buy his shares and those of the other shareholders.
The company passed a resolution treating Dey has having repaid the money
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 he owed and the price of his shares was reduced, so that Mr and Mrs Paul
acquired his shares at a lower price than that payable for the other
shareholders’ shares.
Held:
 The company had given financial assistance in connection with the
purchase of shares by agreeing to treat the defendant as having paid
a certain sum which he at that time owed the company.
 It did not matter that the financial assistance was not given to the
acquirer of the shares; here it was clear that it was given in
connection with the acquisition of shares.

 “Or otherwise” – this widens the definition considerably, eg:

o acquisition of assets with a view to financing an acquisition of the
company’s shares, see Belmont Finance Corporation v Williams
Furniture Ltd (No 2) [1980] 1 All ER 393 (CA)

Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1

All ER 393 (CA)
Williams owned City, which in turn owned Belmont. Grossclout and
others sold a business, Maximum, to Belmont for ₤500,000. It then
used ₤489,000 of the funds to buy Belmont from City [thus owning both
Belmont and Maximum now].
 FA given by B to G to assist G in acquiring B shares from C.
 A breach of [s 76] occurred even if £500k for the Maximum shares
were a fair price. Purchase of Maximum shares by B was not a
commercial transaction in its own right but merely part of a scheme
to enable G to acquire B at no cost to themselves (NB. Maximum
remained under control of G through B post transaction). Belmont
did not acquire anything that it genuinely needed for its own
purpose.
 Who’s liable to who for what?
o Dfs liable for civil conspiracy to contravene [s76];
o C liable to B as constructive trustee in respect of the £489k
it received (on the basis of knowing receipt).
 Court left open the question if there was a breach of [s76] if B
entered into the transaction genuinely for its own commercial
interests, though partly with the object of putting G in funds to
acquire B shares.

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 o payments of costs incurred in relation to an acquisition of shares:
eg, Chaston v SWP plc [2002] EWCA Civ 1999

~ In PP v Lew Syn Pau [2006] 4 SLR(R) 210, Menon JC indicated that the
test is whether the company’s assets are, “in the ordinary commercial
sense” used or put at risk in connection with the acquisition of its shares
(at [107]).

PP v Lew Syn Pau [2006] 4 SLR(R) 210

Facts:
Compart Mauritius was a company incorporated in Mauritius. Compart
Mauritius was a wholly-owed subsidiary of Compart Singapore, which in
turn was a subsidiary of Compart Holdings. Compart Holdings itself was a
subsidiary of Broadway Industrial Group Limited ('BIGL'). The first accused,
Lew, was a director of Compart Mauritius, Compart Singapore and Compart
Holdings (collective, the 'Compart Group'). Wong was also a director of each
of the companies in the Compart Group, as well as the BIGL, and the
executive chairman of BIGL. An individual, Tan, wanted to invest in BIGL and
incorporated a company, ST, for this purpose. The share placement
agreement executed between ST and BIGL provided that ST would take up
new shares in BIGL in exchange for a sum of money. As Tan then had
difficulty coming up with the required funds, Lew was asked by Wong to
procure a loan from Compart Mauritius, and in turn advanced the loan to
Tan to enable the placement to be completed, on the understanding that
Tan would repay the money.

Held, no FA by BIGL:
 DEPLETION OF ASSETS TEST: In order to establish that a company had
given “financial assistance”, the real issue was whether the assets of the
company had in fact been used or been put at risk for the purpose of
the intended acquisition. If the answer to this was in the affirmative,
then there could have been financial assistance in the relevant sense
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Company Law Seminar 9
 whether or not the risk had materialised.
 To establish financial assistance, it will be necessary to establish that
there has been a depletion of the assets of the company but this may
not always be sufficient.
o The company may have entered into the transaction for
perfectly good and legitimate commercial reasons rather than
to deplete its assets in aid of the intended acquisition of its own
shares.
o It would neither be desirable from the perspective of promoting
legitimate enterprise nor necessary from that of protecting the
company and its creditors, since some risk is inevitable in free
enterprise, to lean in favour of invalidating such transactions
without regard to the real commercial interests that caused the
company to enter into the transaction.
 Here, FA took the form of a loan from Compart Mauritius (which is not
subject to s76 because it is a foreign company). Since BIGL is the
company charged with FA, and there is no basis for lifting the corporate
veil, charge against BIGL must fail.

o “purpose” requirement
 must be a substantial purpose – s 76(3)
 note the Court of Appeal’s decision in Intraco Ltd v Multi-Pak
Singapore Pte Ltd [1994] 3 SLR(R) 1064
☼ cf. the Court of Appeal’s criticism of its earlier Intraco v Multi-
Pak decision in Wu Yang Construction v Mao Hong Yui
[2008] 2 SLR(R) 350 (CA)
o “in connection with” requirement
 company must be aware that would assist acquisition – s 76(4)

Multi-Pak Singapore Pte Ltd v Intraco Ltd

Facts:
The target company Multi-Pak had been formed to supply paper to City Carton. City
Carton was owned by the owners of Multi-Pak through another company. City Carton
also had a wholly-owned subsidiary Box-Pak. City Carton and Box-Pak together owed
Intraco $2,545,897.83. This debt was worthless as both City Carton and Box-Pak were
insolvent. Eventually, an agreement was reached between Intraco and Multi-Pak for
Multi-Pak to pay Intraco $2,371,079.62 for the worthless debt, followed by Intraco
using the same funds to subscribe for $2m of Multi-Pak’s shares, and lend the balance

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 to Multi-Pak. In essence, this was an equity-debt swap.

Held:
 Court used Charterhouse approach.
 Here, Multi-Pak allotted shares to Intraco for consideration other than cash (viz
assignment of Debt). Doubtful if this amounted to FA.
 Even if transaction amounted to FA, second element [purpose/in connection with]
not satisfied since Multi-Pak had entered into transaction for its own commercial
interest. Transaction was entered into bona fide for the interest of Multi-Pak as
well, and not solely or mainly for the purpose of enabling Intraco to acquire shares
in MultiPak at no cost [given worthless nature of debt] to Intraco.

Wu Yang Construction v Mao Hong Yui [2008] 2 SLR(R) 350 (CA)

Facts:
The alleged illegal transaction involved VGO purchasing Kingsea’s F&B subsidiary Spring
Wave, where VGO provided consideration in the form of newly issued VGO shares, fell
foul of s76(1)(a).

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 Held:
 Ratio: No FA by VGO to Kingsea to acquire VGO shares. The sale of Spring Wave by
Kingsea to VGO was, on the facts, not based solely on Spring Wave’s NAV, and in
any event, there was no discrepancy between the consideration paid and the NAV.
 Obiter:
o Court applied Charterhouse test. If CA in Intraco v Multi-Pak laid down the
principle that a transaction that was in the commercial interests of the
assisting company can never breach s 76(1), then the proposition laid
down would be too wide and would also be inconsistent with the language
of s 76(1). Need to distinguish between the “ reason” and “purpose” of the
assisting company entering into the transaction.
o The fact that a transaction is in the interests of the assisting company does
not, by itself, lead to the conclusion that the transaction therefore cannot
offend s 76 of the CA.
 The element of commercial interest is only relevant in the context
of examining the purpose for which the assisting company enters
into a transaction.
o On facts, it was clear beyond any doubt that VGO's sole purpose in
acquiring Spring Wave as a going concern from Kingsea was to expand its
own business into the food and beverage industry. o Therefore, there was
in any case no illegal financial assistance.

Exemptions from the prohibition

The width and interpretative problems of s 76(1) are somewhat ameliorated by

the available exemptions:

o Financial Assistance is less than 10% of paid-up capital and reserves – s 76(9A)

 Essential conditions:
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 (i) company receives fair value
(ii) passing of a Board resolution to confirm that assistance is in the best
interests of the company and the terms of the transaction are fair
(iii) all directors make a solvency statement (defined in s 7A)

o Financial Assistance by shareholders’ unanimous approval ~ s 76(9B)

 Essential conditions:
(i) passing of a Board resolution to confirm that assistance is in the best
interests of the company and the terms of the transaction are fair
(ii) all directors make a solvency statement (defined in s 7A)
(iii) approved by all shareholders

o Financial Assistance not causing material prejudice ~ s 76(9BA)

 Essential conditions:
(iv) assistance does not “materially prejudice” the interests of the
company or its shareholders or the company’s solvency
(v) passing of a Board resolution to confirm (specifying full reasons) that
the terms of the assistance are fair and reasonable

o Financial Assistance by Special Resolution (aka “a whitewash”) – s 76(10) et

seq.

 Essential conditions:-
(i) company’s approval by special resolution
(ii) listed holding company or ultimate holding company’s approval by
special resolution
(iii) disclosure
(iv) board statement as to effect on company of giving the assistance
(v) members, debenture holders & creditors may object to the proposed
transaction in court
(vi) but special resolution and court approval do not relieve director from
his duty under s 157 and other fiduciary duties in connection with the
giving of the financial assistance, see s 76(15).

o Miscellaneous exemptions
 s 76(8) – this is an important provision which you are expected to be
familiar with
 s 76(9)(a) – loans etc by banks and financial institutions
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  s 76(9)(b) – employee share option scheme
 s 76(9)(c) – share buy-backs under ss 76B to 76G

8. Consequences of Contravention of Section 76

The legal effect and remedies arising from the breach of s 76 and the related
statutory rules are quite complex. We will not look closely at the detailed
position, but note the following possible effects, some of which are stated in
the Companies Act and others of which arises from general principles of
common law.

 Criminal liability for officers – but not company – s 76(5)

76(5)
If a company contravenes subsection (1) or (1A), the company shall not be guilty
of an offence, notwithstanding section 407, but each officer of the company
who is in default shall be guilty of an offence and shall be liable on conviction to
a fine not exceeding $20,000 or to imprisonment for a term not exceeding 3
years or to both.

 Validity of contract – s 76A(2)

76A(2)
Subject to subsection (1), a contract or transaction made or entered into in
contravention of section 76, or a contract or transaction related to such contract
or transaction, shall be voidable at the option of the company. The company
may, subject to the following provisions of this section, avoid any contract or
transaction to which this subsection applies by giving notice in writing to the
other party or parties to the contract or transaction.

 Liability to compensate persons who suffered loss – s 76A(4) & (5)

76A(4) and (5)

(4) Where —
(a) a company makes or performs a contract, or engages in a transaction;
(b) the contract is made or performed, or the transaction is engaged in, in
contravention of section 76 or the contract or transaction is related to a
contract that was made or performed, or to a transaction that was

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 engaged in, in contravention of that section; and
(c) the Court is satisfied, on the application of the company or of any other
person, that the company or that other person has suffered, or is likely
to suffer, loss or damage as a result of —
(i) the making or performance of the contract or the engaging in of the
transaction;
(ii) the making or performance of a related contract or the engaging in
of a related transaction;
(iii) the contract or transaction being void by reason of subsection (1) or
avoided under subsection (2); or
(iv) a related contract or transaction being void by reason of subsection
(1) or avoided under subsection (2),
the Court may make such order or orders as it thinks just and equitable
(including, without limiting the generality of the foregoing, all or any of the
orders mentioned in subsection (5)) against any party to the contract or
transaction or to the related contract or transaction, or against the company
or against any person who aided, abetted, counselled or procured, or was,
by act or omission, in any way, directly or indirectly, knowingly concerned in
or party to the contravention.
(5) The orders that may be made under subsection (4) include —
(a) an order directing a person to refund money or return property to the
company or to another person;
(b) an order directing a person to pay to the company or to another person
a specified amount of the loss or damage suffered by the company or
other person; and
(c) an order directing a person to indemnify the company or another
person against any loss or damage that the company or other person
may suffer as a result of the contract or transaction or as a result of the
contract or transaction being or having become void.

 Exemption from liability – s 76A(6) & (13)

76A(6) and (13)

(6) If a certificate signed by not less than 2 directors, or by a director and a
secretary, of a company stating that the requirements of section 76(9A), (9B),
(9BA) or (10) (as the case may be), inclusive, have been complied with in
relation to the proposed giving by the company of financial assistance for the
purposes of an acquisition or proposed acquisition by a person of shares or units
in the company or in a holding company or ultimate holding company, as the
case may be, of the company is given to a person —

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 (a) the person to whom the certificate is given is not under any liability to
have an order made against him under subsection (4) by reason of any
contract made or performed, or any transaction engaged in, by him in
reliance on the certificate; and
(b) (b) any such contract or transaction is not invalid, and is not voidable
under subsection (2), by reason that the contract is made or performed,
or the transaction is engaged in, in contravention of section 76 or is
related to a contract that was made or performed, or to a transaction
that was engaged in, in contravention of that section.
…
(13) The power of a Court under section 391 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 extends to relieving a person against whom
an order may be made under subsection (4) from the liability to have such an
order made against him.

 Possible common-law consequences:

~ breach of director’s duties (by misapplication of company assets)
~ imposition of constructive trust
~ tort of civil conspiracy

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9. Solvency Test 

We have seen that most of the relaxations to the Capital Maintenance rule are
conditional upon the making of solvency statements by directors. This serves as a
critical safeguard of creditors’ interests. This “solvency” concept is defined in s 7A
(for purposes of redemption of RPS, financial assistance and capital reduction), and
in s 76F(4) (for purposes of share buy-backs). The previously-differing definitions of
solvency in these two provisions have been harmonised by the 2014 Act.

7A. Solvency statement and offence for making false statement

(1) In this Act, unless the context otherwise requires, “solvency statement”, in relation
to a proposed redemption of preference shares by a company out of its capital under
section 70, a proposed giving of financial assistance by a company under section
76(9A) or (9B) or a proposed reduction by a company of its share capital under
section 78B or 78C, means a statement by the directors of the company that they
have formed the opinion —
(a) that, as regards the company’s situation at the date of the statement, there is no
ground on which the company could then be found to be unable to pay its debts;
(b) where —
(i) it is intended to commence winding up of the company within the period of
12 months immediately after the date of the statement, that the company
will be able to pay its debts in full within the period of 12 months after the
date of commencement of the winding up; or
(ii) it is not intended so to commence winding up, that the company will be able
to pay its debts as they fall due during the period of 12 months immediately
after the date of the statement; and
(c) that the value of the company’s assets is not less than the value of its liabilities
(including contingent liabilities) and will not, after the proposed redemption,
giving of financial assistance or reduction (as the case may be), become less than
the value of its liabilities (including contingent liabilities),
being a statement which complies with subsection (2).
(2) The solvency statement —
(a) if the company is exempt from audit requirements under section 205B or 205C,
shall be in the form of a declaration in writing signed by every director; or
(b) if the company is not such a company, shall be in the form of a declaration in
writing signed by every director or shall be accompanied by a report from its
auditor that he has inquired into the affairs of the company and is of the opinion
that the statement is not unreasonable given all the circumstances.
(3) In forming an opinion for the purposes of subsection (1)(a) and (b), the directors of
the company must take into account all liabilities of the company (including
contingent liabilities).

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 (4) In determining, for the purposes of subsection (1)(c), whether the value of the
company’s assets is or will become less than the value of its liabilities (including
contingent liabilities) the directors of the company —
(a) must have regard to —
(i) the most recent financial statements of the company that comply with
section 201(2) and (5), as the case may be; and
(ii) all other circumstances that the directors know or ought to know affect, or
may affect, the value of the company’s assets and the value of its liabilities
(including contingent liabilities); and
(b) may rely on valuations of assets or estimates of liabilities that are reasonable in
the circumstances.
(5) In determining, for the purposes of subsection (4), the value of a contingent liability,
the directors of a company may take into account —
(a) the likelihood of the contingency occurring; and
(b) any claim the company is entitled to make and can reasonably expect to be met
to reduce or extinguish the contingent liability.
(6) A director of a company who makes a solvency statement without having reasonable
grounds for the opinions expressed in it shall be guilty of an offence and shall be
liable on conviction to a fine not exceeding $100,000 or to imprisonment for a term
not exceeding 3 years or to both.

S 76F(4) CA
For the purposes of this section, a company is solvent if at the date of the payment
referred to in subsection (1) the following conditions are satisfied:
(a) there is no ground on which the company could be found to be unable to pay
its debts;
(b) if —
(ii) it is intended to commence winding up of the company within the
period of 12 months immediately after the date of the payment, the
company will be able to pay its debts in full within the period of 12
months after the date of commencement of the winding up; or
(iii) it is not intended so to commence winding up, the company will be
able to pay its debts as they fall due during the period of 12 months
immediately after the date of the payment; and
(c) the value of the company’s assets is not less than the value of its liabilities
(including contingent liabilities) and will not, after the proposed purchase,
acquisition, variation or release (as the case may be), become less than the
value of its liabilities (including contingent liabilities).

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