Malaysian corporate finance

1. 16
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
CHAPTER 8: CORPORATE FINANCE 11: FINANCIAL ASSISTANCE,
DEBENTURE, CHARGES, CAPITAL MAINTENANCE AND
REDUCTION OF CAPITAL
INTRODUCTION
Another important method by which companies increase their capital is through debt
financing. Debt finance or Loan capital are the terms used to describe the procedure
of borrowing money from lenders outside the company such as bank. The lender, in
this situation, do not become members of the company but remain outside the
company structure. This chapter will examine some of the more common forms of
security granted by the providers of debt finance such as debenture and charges.
This chapter will also examine a number of rules derived from the principle that share
capital must be maintained and the methods of reduction of capital. Finally it will also
examine the prohibition on a company providing financial assistance for the
acquisition on its own shares.
OBJECTIVES
At the end of the chapter you should be able:
1. To understand and explain the nature of a debenture and debenture stock;
2. To explain the nature of fixed and floating charges;
3. To apply relevant common law principles and statutory provisions to given fact
situations regarding the principle that share capital must be maintained;
4. To understand and explain the methods to reduce capital; and
5. To understand and explain the prohibition on a company providing financial
assistance for the acquisition of its own shares and the main exceptions to this
rule.
8.1 DEBENTURE AND CHARGES
Companies quite often raise money through borrowing. This is by undertaking
ordinary unsecured loans, by issuing bills of exchange of promissory notes, by
granting a charge on the property of the company or by the issue of debentures. As
previously stated, this money borrowed is known as loan capital.
A company being a debtor differs from other debtors. A company is given the power
by Company Law to:
 Issue debentures
 Give security by charging its uncalled capital; and
 Grant a floating charge over the company‟s property.

2. 17
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
Banks and private lenders are a significant source in providing capital of a company.
The loan provided may be secured or unsecured. A secured loan is one which the
company gives special rights over its property to the creditor. The creditor is then
able to revoke the amount owned if the company defaults in payments. The security
will be in the form of a charge over the company property or capital. This gives the
creditor the right to apply the secured property towards payment of amount owing to it
Debentures
A „debenture‟ was traditionally thought of as a document under which a company
acknowledges that it has borrowed money for some length of time. The Companies
Act however gives a broad definition s4 (1) provides that it is to include debenture
stock, bonds, notes and any other securities of a company, whether constitutes a
charge on the assets of a company or not.
In the commercial sense a debenture is a series of bonds, which evidences the fact
that the company is liable to pay an amount specified, with interest, and is generally
secured on a charge over the property.
A debenture holder is entitled to obtain payment of the interest sums due to him.
Whether they are principal or interest, the prescribed rate of interest which is
stipulated in the debenture must be paid to the debenture holder irrespective of
whether or not the debtor company is in profit.
Debenture can be issued to the public for the purpose of raising capital. S 38(1)
states that a document issued by a borrowing corporation certifying that a person
named therein in respect of any deposit with or loan to the corporation the registered
holder of a specified number or value of:
(a) Unsecured notes or unsecured deposit notes;
(b) Mortgage debentures or debenture stock; or
(c) Debentures or debentures stock.
Issued by the corporation upon or subject to the terms and conditions contained in
trust deed referred to or identified in the certificate is deemed to be a document
evidencing the indebtedness of that corporation in respect of the deposit or loan.
The Securities Commission Act 1993(SCA) has an identical definition of debenture
with the Companies Act. However it further sets out categories of instrument which
are not classified as debentures.
A public company can raise loan finance form the investing public by way of
debentures. The usually method is for a company to offer to the public a set of
debentures called debenture stock. The holders of the debentures become creditors
of the company for a particular sum of money, being part of the total sum owing in
respect of the debenture stock. A debenture holder will usually be in a much better
position than a shareholder, as in a winding up it will have priority over creditors for
the repayment of its debt. A company must keep a register of debenture holder,
which must contain such detail as the name and address of debenture holder and the
amount of debenture held by them.
A public company proposing to issue debentures generally must:
 Comply with the KLSE Listing Requirements
 Enter into a trust deed which contains the contents specified by the SCA

3. 18
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
 Appoint an eligible trustee : person who are eligible to be appointed as
trustees are identified in the SCA:
 Comply with the other requirements of the SCA and this included the duty to
call a meeting of debenture holders under s 86
As the individual debenture holders may not be in a position to protect their interest, s
67 and s 68 CA 1965 provides for the appointment of a trustee who will protect the
interest of the debenture holders.
Think
What are the two types of loan capital?
Your idea
Why do companies issue debenture?
Fixed and Floating Charges
A charge in the general sense describes a security given by a company over some
or all of its assets in favour of a creditor. S4 defines a charge to include a mortgage
and any agreement to give or execute a charge or mortgage whether upon demand
or otherwise. A charge may be legal or equitable.
Lord Atkins in the case of National Provincial and Union Bank of England v
Charnley [1924] 1 KB 431 defined a charge as:
„……..in a transaction for value both parties evince an intention that property, existing
or future, shall be made available as a security for the payment of a debt, and that the
creditor shall have at present right to have it made available, there is a charge even
though the present legal right which is contemplated can only be enforce at some
future date, and though the creditor gets no legal right of property, either absolute or
special, or any legal right to possession, but only get a right to have the security
made available by an order of the court. If those conditions exist, I think there is a
charge.‟
Fixed charge
A fixed charge is a charge or a mortgage which attaches over a specific asset. It is
an equitable security. It is not necessary for the property to be owned by the
borrowing company or even to be in existence when the charge is given: Holroyd v
Marshall (1862) 10 HLC 191; 11 ER 999.
The consent of the lender must be obtained first, if the company wants to dispose of
the property: Siebe Gorman & co Ltd v Barclays Bank ltd [1979] 2 Lloyds Rep
142.
Property which is subject to a fixed charge and which is sold on to a third party
without the chargee‟s consent will remain subject to the charge unless the third party
is a bona fide purchaser without notice, of the existence of the charge. However,
providing the charge is registered, the third party will be deemed to have notice of its
existence.
S108 (3) (k) provides that a charge over a credit balance in a deposit account is a
registrable charge. The creation of a fixed charge on the book of debts of a company
was affirmed in the case of United Malaysian Banking Corporation Bhd v
Aluminex (M) Sdn Bhd by the Supreme Court.

4. 19
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
In order to create a fixed charge over a corporate asset, the asset in question must
be identifiable, although it need not be in existence at the time the charge was
created. The property to which a fixed charge may attach can be a future property.
The holder of fixed charge has rights which are to be found within the document
creating the charge.
Fixed charge confers an immediate security over the charge property.
Floating Charge
A floating charge is a form of security given by a company over all or specific
category of its assets – usually shifting or circulating assets such as trading stock or
book debts The charge “ floats” over these assets and allow the company to continue
dealing with them in the ordinary course of its business.
In the case of Illingworth v Houldsworth [1904] AC 355 at 358 Lord Macnaghten
drew a distinction between a fixed charge and floating charge
“ A specific charge, I think, is one that without more fastens on ascertained and
definite property or property capable of being ascertained and defined; a floating
charge, on the other hand, is ambulatory and shifting in its nature, hovering over and
so to speak floating with the property which it is intended to affect until some event
occurs or some act is done which causes it to settle and fasten on the subject of the
charge within its reach and grasp”
Only a company may grant a floating charge. In the case of Re Yorkshire
Woolcombers Association Limited [1903] 2 Ch 284, Romer LK stated the
following to be the characteristics of a floating charge
(a) It is a charge on a class of assets of a company present and future;
(b) That class is one which , in the ordinary course of business of the company,
would be changing form time to time; and
(c) ….it is contemplated that , until some future step is taken by or on behalf of
those interested in the charge, the company may carry on its business in the
ordinary way as far the particular class of assets affected by the charge is
concerned.
In the case of Re Lin Securities (Pte) [1988] 1 MLJ 137 it was held that a fixed
charge created over the company‟s entire assets and undertaking is treated as a
floating charge because only a floating charge will allow these secure assets to be
used by the company in its ordinary course of business during the term of the charge.
The benefit of floating charge is that it allows the company to give security over
property such as raw materials, stock in trade and inventory that are constantly
floating into and out of its ownership in the course of carrying its businesses. The
lender has a valid security over this shifting fund of assets but has not right to
interfere in the conduct of the business as long as the company does not breach any
term of the charge and only deals with the charges assets in the ordinary course of
its business.
If the company defaults under the charge, the charge is said to “crystallize”. When
crystallization occurs the charge becomes a fixed charge over the specified asset
then held by the borrowing company. Crystallization will also occur upon

5. 20
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
appointment of a receiver or of a liquidator or when the company ceases to carry on
business.
If a floating charge crystallizes upon the happening of a defined event, the assets
become subject to fixed charge and can be dealt with by the lender. The lender‟s
remedies include appointment of a receiver, suing under the contract or proving in the
winding up.
Priority Rights
Where a receiver or liquidator of a company is responsible of selling corporate assets
to discharge the debts of a company, the realization of such assets may be
insufficient to discharge the amount loaned by individual creditors.
Where there are two charge holders, the question of who has priority will inevitable
arise.
Registration of a charge protects the chargee‟s priority over later, registrable charges.
A charge that is registered earlier than another charge will have priority over it, even if
the second mentioned charge was created before it.
The Companies Act does not determine priority between charges and other interest
or claims which are not registrable under the Companies Act. Priorities between
these interest and claims are governed by the common law principle.
Following issues must be considered to determine the priority of charge:
 Whether the charge was registered
 Whether the charge is fixed or floating
 Where the charge is floating whether it crystallised on commencement of
winding up or prior to that
 Whether there are any preferential creditors.
Based on registration, the priority among registrable charges as follows:
 A registered charge has priority over a later registered charge, even if the
later registered charge was created earlier
 A registered charge has priority over a charge that was created earlier and is
registrable but has not been registered
 A registered charge has priority over a charge created later and which is
registrable but not registered
 A registered charge has priority over an unregistered charge unless the
unregistered charge was create first and the holder of the registered charge
had actual notice or constructive notice at the time of the creation of the
registered chare of the existence of the unregistered charge; and
 Unregistered charge has priority in accordance with their time in creation.
A fixed charge will rank above a floating charge.A floating charge has no priority over
a legal charge. Unless it was created earlier and it has a clause prohibiting the
creation of subsequent charges without the holder of the floating charge‟s consent
and the legal chargee having knowledge of it: United Overseas Bank Ltd v Forward
Overseas Credit [1998] 1 MLJ 496.
Think: What are the issues that must be considered to determine the priority of
charge?

6. 21
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
Your idea: What are the distinctions between a fixed charge and a floating charge?
8.2 CAPITAL MAINTENANCE AND REDUCTION OF CAPITAL
Capital Maintenance
The doctrine of capital maintenance requires companies limited by shares to maintain
their issued share capital in order to protect the interests of the company‟s creditors
and shareholders. Therefore members are entitled to a dividend out of profits. A
company cannot return capital to the members.
In the case of Trevor v Whitworth it was stated that creditors and shareholders are
“entitled to assume that no part of the capital which has been paid into the coffers of
the company has been subsequently paid out, except in the legitimate course of its
business”
CA 1965 sets out some legal methods by which the capital of a company can be
returned to the members.
(a) Reduction of Capital
s64 allows a company to reduce its capital capital if this is authorised by the articles
and the reduction is confirmed by the court. It also requires alteration of the share
capital as stated in the memorandum - this needs a special resolution.
The court will only confirm the reduction if satisfied that the company‟s creditors have
been paid or have consented to the reduction. The test that the court will use is the
fair and reasonable test.
The reason why a company may wish to reduce its capital is because the company‟s
net assets have fallen below the value of the share capital. Generally the reduction of
capital will not be detrimental to the shareholders. The objective of reducing its
capital is to enable the company to resume paying dividends or to pay dividends at a
higher rate.
A company may be able to reduce its share capital in a number of ways which
includes:
1. Reducing liability on the shares that are partly paid: Case: Re Doloswella
Rubber & Tea Estates Ltd [1917] 1 Ch 213
2. Cancelling paid-up share capital that has been lost to available assets: Case:
Re Rhodesian Manufacturing Co ltd [1927] SASR 310
3. Pay off or return any of the paid up capital that is in excess of its needs to its
shareholders: Re Fowlers Vacola Manufacturing Co Ltd [1966] VR 97
Case: Ex parte Westburn Sugar Refineries Ltd [1951] AC 630
Facts: The government of the day was proposing to nationalize Westburn Sugar
Refineries Ltd. The company had valuable investment holdings among its assets
which it was keen to keep out of the forthcoming nationalization of its sugar business,
so it transferred these investment assets to an investment holding company
especially formed for the purpose in return for being allotted shares in that company..
Westburn Sugar Refineries Ltd then reduced the nominal value of all its ordinary
shares from £1 to 18 shillings and all its ordinary shareholders received a two shilling

7. 22
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
nominal value share in the new investment holding company as part of that reduction.
However, the investment assets actually held by the investment holding company
were worth great deal more than just two shilling per share. the Scottish High court
would not allow this scheme on the ground that the actual value of the capital assets
being return was far in excess of the nominal value of the capital sought to be
reduced
Held: The House of Lord held that this was immaterial, what mattered was not the
value of the investment which the company proposed to transfer, but rather the value
of the assets which it would retain. The company must ask , in its examination of a
proposed reduction of capital, whether the rights of the creditors of he company are
prejudiced and whether shareholders have been treated fairly, in particular if the
proposed reduction on deals with different classes f of member fairly and equitably.
Subject to making those enquiries, though it was not the place of the court to enquire
into the company‟s motive for reduction.
A buy back can be distinguished from a reduction of capital. This is stated under s 64
CA 1965
In a buy back, the member has the option of refusing to sell, while in a reduction of
capital the members‟ shares can be cancelled against their will; While a reduction of
capital may not necessarily involve a payment to members when the shares are
cancelled.
A company may wish to undertake a reduction of capital to return capital to members
that is no longer required by the company , to cancel uncalled capital that is no
longer required or to cancel capital no longer represented by available assets.
If the proposed reduction does not meet the requirement of s 64, the creditor may
approach the court for an injunction under s 64(2)
(b) Redeemable Shares
CA 1985 s.159 (1) states that a company can issue redeemable shares if power to do
so is given by the articles.
The shares give a temporary membership of the company - the nominal value (and
sometimes a premium) is paid to the shareholder at the end of the period.
When shares are redeemed they must be cancelled by the company. The company
must make up its capital by issuing new shares or transferring funds from the profit
and loss account to the capital redemption reserve account.
Any premium payable on redemption must be paid out of profits.
Private companies can pay for redemption completely out of capital by a special
resolution and a declaration from the directors that the assets will exceed liabilities
after the payment is made.
(c) Company purchasing its own Shares ( Share buy back)
The prohibition of a company purchasing its own shares was first expressed in the
case of Trevor v Whitworth.
Case:Trevor v Whitworth (1887) 12 App Cas 409
Facts:The memorandum of the company did not authorise the company to purchase
its own shares but this was permitted by the articles of association. The appellant was
the liquidator of the company and the respondent was the executor of a deceased
shareholder who had sold his shares in the company to the company and was now
claiming for full payment of the purchase price. Both the lower courts allowed the
claim but it fell to the House of Lords to decide as a matter of law whether a limited
company could purchase its own shares.

8. 23
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
Held Except where specifically provided for by Companies legislation a company is
prohibited from purchasing its own shares. The reasoning behind this strict prohibition
is the protection of those dealing with the company who are entitled to assume that
moneys subscribed by shareholders for the purpose of the company‟s business are to
be available to meet their claims against the company. There would be little purpose
in having the strictly prescribed reduction of capital procedures and provisions if these
could be circumvented by a company simply buying in its own shares.
Lord Watson laid down the basic prohibition against a company buying its own shares
and explained its rationale :
“One of the main objects contemplated by the legislature, in restricting the
power of limited companies to reduce the amount of their capital as set forth in the
memorandum, is to protect the interests of the outside public who may become their
creditors. In my opinion the effect of these statutory restrictions is to prohibit every
transaction between a company and a shareholder, by means of which the money
already paid to the company in respect of his shares is returned to him., unless the
court has sanctioned the transaction. Paid-up capital may be diminished or lost in the
course of a company‟s trading; that is a result which no legislation can prevent; but
persons who deal with, and give credit to a limited company naturally rely
upon the fact that the company is trading with a certain amount of capital already
paid, as well as upon the responsibility of its members for the capital
remaining at call; and they are entitled to assume that no part of the capital which has
been paid into the coffers of the company has been subsequently paid out, except in
the legitimate course of its business.
When a share is forfeited or surrendered, the amount which has been paid
upon it remains with the company, the shareholder being relieved of liability for future
calls, whilst the share reverts to the company, bears no dividend and may be re-
issued. When shares are purchased. at par, and returned to the company, the
result is very different. The amount paid up on the shares is returned to the
shareholder; and in the event of the company continuing to hold the shares (as in
the present case) is permanently withdrawn from its trading capital. It appears to me
that....it is inconsistent with the essential nature of a company that it should become a
member of itself. It cannot be registered as a shareholder to the effect of becoming a
debtor to itself for calls, or of being placed on the list of contributories in its own
liquidation....”
Generally this is prohibited by s. 67, but this section itself allows a company to buy
its own shares in the circumstances provided by the Act and s 67A allows such
purchase if authority is given in the company‟s articles.
The exception under s 67 are as follows:
 Where the exceptions set out in s 67(2) applies;
 Where a company redeems its redeemable preference share: s 61
 Where the court makes an order for he company to purchase shares of the
applicant: s 181 (2) (c ); and
 Where a public listed company purchases its own shares through the KLSE :
s 67A
S 67(3) provides that the officers and not the company will be guilty of an offence , if
the officers approved the unlawful transaction. S 67(4) provides that the convicted

9. 24
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
officers must pay compensation to the company and any third party for any loss or
damage suffered.
A share buy back is any transaction by which a company buys back its own shares
form existing shareholders. This transaction involves an agreement between the
company and the selling shareholders to transfer shares to the company in return for
consideration provided by the company. A share buy back can only take place with
the consent of the shareholders whose shares are being bought back while a capital
reduction can take place without requiring the consent of the shareholders whose
capital is being returned, provided that it complies with the set of requirement apply to
capital reductions.
Under s 67A a public listed company may apply to purchase its shares through stock
exchange. The conditions are:
(a)The company must ensure that the company is solvent at the date of the purchase
and will not be come insolvent;
(b)The Company must ensure that the purchase of shares by the company is done
bona fide and in the interests of the company;
(c )The company is permitted to apply its share premium account to pay for the
shares that it has purchase. The shares purchase may either be cancelled or
retained as treasury shares;
(d)The purchase is made through KLSE ie it must be purchased in the open market;
and
The shares cancelled cannot be deemed to be a reduction of share capital and the
special procedures prescribe for reduction of capital by s 64 will not apply.
Why might a company wish to buy its own shares?
-lack of acquisition opportunities and lack of investment opportunities
within the company
-balance sheet strength - equity capital more expensive than debt
capital (because of "equity risk premium")
-because it thinks the market is undervaluing its shares
S 67(1) also prohibits a company on other grounds;
(a) Giving direct or indirect financial assistance. For the acquisition of its own
shares
(b) Giving director or indirect financial assistance to a subsidiary company to
acquire the shares of its holding company
(c) Lending money on the security of its own shares; and
(d) Dealing in its own shares
However, this prohibition is subjected to certain exceptions which is expressly
provided for by s 67(1)
Financial Assistance by the company for the purchase of its own shares:
S 67(1) provides that a company is prohibited from giving direct or indirect financial
assistance for the purpose of or in connection with a purchase or subscription by any
person of the shares in the company, unless expressly provided for in the act.

10. 25
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
S 67 however, does not define Financial Assistance. Examples derived from case
laws would include a company lending money to a person to be used to acquire
shares in the company or its holding company,a company guaranteeing a laon by a
third party to a person who will use the loan funds to acquire shares in the company,
a company making a gift to a person, which is used to acquire shares and reducing
the liability of a person in connection with the acquisition of the compnay‟s shares.
Cases such as Cheah Theam Swee & Anor v Overseas Union Bank Ltd & Ors
[1989] 1 MLJ 426 ; Utama Wardley & Anor v Leggan laut Development Sdn Bhd
& Anor [1991] 3 CLJ 2233 and Yap Sing Hock Holdings Bhd v Chuah Teong
Hooi & Ors [1989] 2 MLJ 503 all indicate the courts reluctance to define financial
assistance . For by doing so, it might result in the risk of having to exclude
transaction that ought to be included. Courts however, have attempted to provide a
general guidance as to what may be regarded as financial assistance
Datuk Tan Leng Teck v Sarjana Sdn Bhd & Ors [1997] 4 MLJ 329, Augustine Paul
CJ said: “The words „or otherwise‟ are very wide and mean „in any other way‟. In this
regard I refer to EH Dey Pty Ltd ( In Liquidation) v Dey [1966] VR 464….The
essence of the question whether a company has contravened s 67(1) is whether it
has diminished its financial resources, including future resources, in connection with
the sale and purchase of its shares and the matter is not to be determined by
considering only what is done by the parties to the transaction…the giving of finance
assistance means making a provision in money or money‟s worth to which a
shareholder was not already entitled in his capacity as a shareholder ( see Rossfield
Group of Operators Pty Ltd v Austral Group Ltd [1981] Qd R 279”
Case:Ching Kiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd [1990] 1 MLJ
Facts: Ching Kiaw Bank (CKB) gave a loan to the company. The company used the
fund to purchase shares in Hotel Rasa Sayang. The loan was secured by Rasa
Sayang by creating a charge over its property and asset. When the company
defaulted in payment, the bank wanted to enforce the security.
Held: There was financial assistance in that transaction. However the bank could not
enforce the security because s67(6) ( as it was prior to 1992 amendment) did not give
locus standi to any person other than the company giving financial assistance to
recover the loan or any amount given in contravention of the section.
Case:Wallersteiner v Moir [1974] 3 All ER 217
see the judgment of Lord Denning in which he said:
" It [s. 54 of the 1948 Act] was enacted so as to deal with a mischief which was
described by Lord Greene MR in Re VGM Holdings Ltd [19421 I All ER 224 at 225,
[1942] Ch 235 at 239.
'Those whose memories enable them to recall what had been happening for
several years after the war will remember that a very common form of
transaction in connection with companies was one by which persons -call
them financiers, speculators, or what you will - finding a company with a
substantial cash balance or easily realisable assets, such as war loan,
bought up the whole, or the greater part, of the shares of the company for
cash, and so arranged matters that the purchase money which they then
became bound to provide was advanced to them by the company whose
shares they were acquiring, either out of its cash balance or by realisation of

11. 26
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
its liquid investments. That type of transaction was a common one, and it
gave rise to great dissatisfaction and, in some cases, great scandals.'
Lord Greene MR spoke those words in the year 1942. Since that time
financiers have used more sophisticated methods. You have only to look at
such cases as Steen v. Law [ 1 9631 3 All ER 770, [19641 AC 287 and
Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 2 All ER
1073, [1968] I WLR 1555 to see the devices which they use. Circular cheques
come in very handy. So do puppet companies. The transactions are
extremely complicated, but the end result is clear. You look to the company's
money and see what has become of it. You look to the companv's shares and
see into whose hands they have got. You will then soon see if the company's
money has been used to finance the purchase."
Case:Belmont Finance Co. v Williams Furniture Ltd. (No. 2) [1980] 1 All ER 393
Facts:A company known as “City” owned all the shares in Belmont. The Directors of
Belmont, along with others, agreed to a transaction one of the terms of which was
that a property was sold to Belmont for £500,000. This sum was paid by Belmont to
the vendors of the property. City then sold all the shares it owned in Belmont to the
vendors of the property for £489,000.
Held Belmont, in buying this property from the vendors made cash available to them
and thereby assisted the vendors of the property to buy all of its shares. The net
effect of these two deals amounted to illegal financial assistance provided by
Belmont.
Lord Justice Buckley said :
"Foster J treated as a proposition of law, accepted by counsel for Belmont, that a
company does not give financial assistance in connection with a purchase of its own
shares within the meaning of s.54 by reason only of its simultaneous entry into a
bona fide commercial transaction as a result of which it parts with money or money's
worth, which in turn is used to finance the purchase of its
own shares. He went on to find that the negotiations in the present case were at
arm's length and that on the one side Mr James genuinely believed that to buy the
capital of Maximum for £500,000 was a good commercial proposition for Belmont and
on the other side Mr Copeland honestly believed that in October 1963 the value of the
capital of Maximum with Mr Grosscurth's guarantee of Maximum's profits under cl
13(h) of the agreement secured on Rentahome's share capital was not less than
£500,000. On these findings he reached the conclusion that the agreement was a
bona fide commercial transaction, on which ground he dismissed the action.
The reasoning assumes, as I understand it, that if the transaction under consideration
is genuinely regarded by the parties as a sound commercial transaction negotiated at
arm's length and capable of justification on purely commercial grounds, it cannot
offend against s. 54. This is, I think, a broader proposition than the proposition which
the judge treated as having been accepted by counsel for Belmont.
If A Ltd buys from B a chattel or a commodity, like a ship or merchandise, which A Ltd
genuinely wants to acquire for its own purposes, and does so having no other
purpose in view, the fact that B thereafter employs the proceeds of the sale in buying
shares in A Ltd should not, 1 would suppose, be held to offend against the section;
but the position may be different if A Ltd makes the purchase in order to put B in
funds to buy shares in A Ltd. If A Ltd buys something from B without regard to its own
commercial interests, the sole purpose of the transaction being to put B in funds to

12. 27
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
acquire shares in A Ltd, this would, in my opinion, clearly contravene the section even
if the price paid was a fair price for what is bought, and a fortiori that would be so if
the sale to A Ltd was at an inflated price. The sole purpose would be to enable (i.e.
to assist) B to pay for the shares. If A Ltd buys something from B at a fair price,
which A Ltd could readily realise on a resale if it wished to do so. but the purpose, or
one of the purposes, of the transaction is to put B in funds to acquire shares of A Lid,
the fact that the price was fair might not, I think, prevent the transaction from
contravening the section, if it would otherwise do so, though A Ltd could very
probably recover no damages in civil proceedings, for it would have suffered no
damage. If the transaction is of a kind which A Ltd could in its own commercial
interests legitimately enter into, and the transaction is genuinely entered into by A Ltd
in its own commercial interests and not merely as a means of assisting B financially
to buy shares of A Ltd, the circumstances that A Ltd entered into the transaction with
B. partly with the object of putting B in funds to acquire its own shares or with the
knowledge of B's intended use of the proceeds of sale, might, 1 think, involve no
contravention of the section, but 1 do not wish to express a concluded opinion on that
point. "
A subsidiary company cannot give loan, give security or guarantee or any form of
financial assistance to a person who acquires shares in its holding company.
Case: Armour Hicks Northern ltd v Armour Trust Ltd [1980] 3 All ER 833
Facts:Two directors of Armour Hicks Northern (AHN) were also the directors of its
holding company. The holding company owed some debts to one of its shareholders.
The directors of AHN managed to get AHN to pay the debts of its holding company.
The creditor‟s of AHN‟s holding company transferred its shares n the holding
company to the directors. Without the directors arranging for the settlement of the
debt to the creditor, the creditor would not have transferred the shares to the two
directors.
Held: This was financial assistance by a subsidiary for the purpose of acquisition of
shares in its holding company
Financial Assistance is permitted in certain circumstances as laid out below:
 The company lends money in the course of its ordinary business
 If the financial assistance is in accordance with any scheme for the benefit of
employees of the company or its subsidiary
 It is to employees ( other than directors of the company) of its subsidiary to
enable them to purchase shares in the company or its holding company.
Think:
What is a share buy back?
What is a reduction of capital?
Your idea:
What is the procedural requirement of a share buy back?
Does the law permit a company to reduce its capital in any circumstances?

13. 28
CHAPTER 8
UNIT 3 Company Law
Corporate Finance II:
SUMMARY
A company‟s net asset must be maintained in conjunction with the company‟s
notional liability. A company‟s share capital represents a measure by which assets
values should correspond. A company if permitted by the terms of its articles, may
alter the condtions of its memorandum to effect an alteration in share capital. A
company may wish to reduce its share capital for a number of legitimate reasons as
discussed above. Share buy back by a company and financial assistance given to a
third party for the purchase of a company‟s shares are prohibited but not without
legitimate exceptions laid out in the legislation and case laws.