Maintenance of Capital
If you are a company owner or shareholder, you should know the basic meaning of maintaining capital.
Generally, in accordance with Singapore law, a company must maintain its capital in such a way that it cannot use the same to pay dividends to shareholders. You can only use profits to pay members.
What are the General Principles of Maintaining Capital?
There are 5 general principles to follow in the maintenance of capital.
A company may not:
- purchase its own shares or those of its holding company unless permitted by the Companies Act – [section 76(1A)(a) of the Companies Act];
- lend money on the security of its own shares or those of its holding company – [section 76(1A)(b) of the Companies Act];
- (in relation to a public company) help a third party with funds to acquire shares from your company or those of the holding company unless permitted by the Companies Act [section 76(1) of the Companies Act];
- decrease its capital or give assets to its shareholders, unless permitted by the Companies Act [section 78 of the Companies Act]; or
- use any other way apart from profits gained to pay dividends [section 403 of the Companies Act].
Variation of Share Capital
If you want to alter or change your company’s share capital, this can only be done in general meeting, if authorised by the constitution of the company. This can be accomplished in the following ways:
- A consolidation or a division of the total or part of the share capital;
- A conversion of the total or part of the paid-up shares into stock and vice versa;
- A subdivision of the total or part of shares so long as subdivision maintains the amounts paid on each reduced share and the amounts unpaid on each reduced share; and/or
- A cancellation of shares that are yet to be taken by any individual, or forfeited shares. The company can use the proportion to reduce the share capital.
If your constitution allows, any of the alterations listed above may be effected at a general meeting. On the other hand, the constitution may prohibit any change or it may require the alterations to be made in a particular way, for example by special resolution.
In addition, where the constitution does not exclude or restrict the conversion of share capital across different currencies, your company may by ordinary resolution do so.
Can a Company Acquire its Own Shares?
It is a general rule that companies cannot deal in their own shares, subject to exception as by the Companies Act. However, under section 70 of the Companies Act, a company may be allowed to do so by order of court, share buy-back or when issuing preference shares redeemable at the option of your company.
Reduction of Capital
If directors of your company decides to reduce it capital, this must be done by special resolution using a method provided under Pt IV, Div 3A of the Companies Act. You can apply the following 2 methods of permitted capital reduction:
- court sanctioned capital reduction found in s 78G to 78I of the Companies Act; and
- non-court sanctioned capital reduction found in s 78B to 78F of the Companies Act (depending on the type of company).
On top of the above methods, the constitution of the company may limit its share capital reduction. The following 3 ways by which share capital may be reduced are specified in the Companies Act:
- reduce the liability on its shares if share capital is not paid up;
- return any paid-up capital to shareholders if it’s in surplus; or
- cancel any lost or unrepresented paid-up capital.
For any other reasons to reduce capital, the company will need a court or non-court sanctioned capital reduction as described below.
Reductions of Capital with a Court Sanction
You must hold an extraordinary general meeting first in order to come up with a special resolution with regard to reducing capital using a courts approval. The court-sanctioned capital reduction procedure helps in the protection of shareholders’ creditors’ interests.
After the capital reduction of a company has been sanctioned by the court, the company must lodge a copy of the court order as well as the reduction information with ACRA within 90 days.
Taking into account each qualifying creditor, the court would need to be satisfied that he/she:
- has agreed to the capital reduction;
- has sufficient safeguards for it as well as other debts; or
- feels protected by other company assets even after the reduction.
Reductions of Capital without a Court Sanction
There are certain methods by you may reduce the capital of your company under the Companies Act that do not require a sanction from the Singapore Court. The requirements for private and public companies will differ only slightly for this. Both processes require:
- a special resolution passed at an EGM;
- a declaration of solvency by the all the directors of the company. Such solvency statements are valid for 20 or 30 days respectively, and should be circulated to the shareholders at the EGM.
- the creditors have the rights to object to this reduction within 6 weeks of the special resolution of the company’s shareholders being passed; and
- the requirements in relation to the publicity of the reduction are met (as currently set out in reg 6 of the Companies Regulations).
The non-court sanctioned procedure takes up to 8 weeks to be completed and requires:
- the shareholders’ special resolution;
- a solvency statement by all the directors which is valid for 20 days and 30 days for private companies and public companies respectively;
- the provision of a six-week creditor objection period (which cannot be abridged);
- filings with ACRA upon passing of the shareholders’ resolutions and may additionally publish a notice containing the reduction information in a local daily newspaper;
- a compliance statement signed by all directors confirming that no objections have been received; and
- (where there have been no objections), the lodgement of the solvency statement and a notice containing the reduction information after the six-week creditor objection period and before the end of eight weeks starting from the date the resolution was made.
However, you company does not need a solvency statement if the proposed reduction of share capital does not include cash/asset reduction or distribution or a release of liability.
For example, if your company is writing off losses that have been carried forward by cancelling share capital that has been paid-up, a solvency statement is not required. Once the capital reduction process is completed, the books of the company should be updated to reflect the changes. In addition, share certificates representing the share(s) cancelled will have to be given back to your company secretary for cancellation.
Can Creditors Object Capital Reduction?
If your company has creditors entitled to any amount of debt or claim, you should know that they can object your application for capital reduction within 6 weeks of applying for the same using a special resolution. In accordance with the Companies Act, such creditors would need to serve a notice of your company’s application to both the court and ACRA.
In addition, the court may also consider looking into complaints from the general public who fall under the different classes of shareholders, especially if they were unscrupulously enticed to buy shares from your company without their prior knowledge about the negative effects of capital reduction.
In accordance with the Companies Act, public companies, or subsidiaries of public companies are generally prohibited from financing individuals and business entities to buy its shares, or those of its holding company or ultimate holding company.
However, as outlined in section 76 of the Companies Act, there are a number of exceptions to this general rule. For example:
- if the amount does not exceed 10% of your company’s total paid-up capital (section 201 of the Companies Act), and that your company receives fair value as regards the financial assistance;
- if the financial assistance does not substantially compromise your company’s interests as well as the ability of your shareholders to pay creditors; or
- if all company members approve the amount by a written resolution and voting;
- as outlined under section 76(10) of the Companies Act, if a company approves the financial assistance is by a special resolution and published the notice in a local daily newspaper.
The board of directors must approve all the above mentioned procedures, with the first 2 necessitating a solvency statement. Other transactions are also exceptions to the general prohibition in section 76 of the Companies Act.
Conclusion - Maintenance of Capital
If you are a company owner or a shareholder in Singapore and you need guidance on matters concerning the maintenance of capital, contact our experts at Tianlong Services today and we will help you digest the above information effortlessly and answer all your questions satisfactorily.