Question

Companies Act 2016 introduces the solvency test. The solvency test operates on the basis that a company must ensure that it has sufficient funds to pay its debts to its creditors for the following purposes:
(a) Redemption of redeemable preference shares.
(b) Purchase by a company of its own shares under the share buyback provision.
(c) Reduction of capital.
(d) Giving financial assistance.
Discuss the relevant provisions of the Companies Act 2016 (Malaysia) which govern the solvency test and solvency statement.

Answer 1

Section 113 of companies act 2016 deals with solvency statement and Section 112 of companies act 2016 deals with solvency test. Company's some transactions are to be made only if company complies with solvency test.

The solvency test operates on the basis that a company must ensure that it has sufficient funds to pay its debts to its creditors for the following purposes:
(a) Redemption of redeemable preference shares.
(b) Purchase by a company of its own shares under the share buyback provision.
(c) Reduction of capital.
(d) Giving financial assistance.

Purpose of solvency test is to ensure that after carrying out any transaction there is no ground to the company to be unable to payoff it's debts and assets of the company are sufficient to pay off the liabilities on the date of transaction. The company must be able to pay-off it's debts within 12 months from date of transaction and if the intention is to wind up, debt must be paid within 12 month after commencement of winding up.

CHANGES TO REDEMPTION OF REDEEMABLE PREFERENCE SHARES
If authorised by the company's constitution, a company may issue preference shares which are redeemable at a future date and redeemable at the company s option. In line with the introduction of the solvency test the Companies Act 2016 provides that the redemption of the redeemable preference shares may be funded by:
(a) profits
(b) fresh issue of shares, or
(c) capital of company. Redemption out of the capital of the company is subject to:
(i) all directors have made a solvency statement, and
(ii) company lodging the solvency statement with the Registrar
The preference shares to be redeemed must also have been fully paid for.

Purchase by a company of its own shares under the share buyback provision.

A significant change to the share buyback rules introduced by the Companies Act 2016 relates to allowing a public-listed company to carry out an off-market purchase of its shares. Under the Companies Act 2016, a public-listed company may buyback its own shares if it is so authorised by its constitution, either
(a) through the stock exchange in accordance with the rules of the stock exchange, or
(b buy back its own shares otherwise than through a stock exchange if the purchase is: permitted under the relevant rules of the stock exchange, and made in accordance with such requirements as may be determined by the stock exchange
A majority of the directors must make a solvency declaration belore the company can buy back its shares. This is similar to the requirement under the Companies Act 1965. The solvency statement must be made by a majority of the directors and these directors must make a declaration that:
(a) it is necessary for the company to buy back its shares
(b) the share buyback is made in good faith and in the best interest of the company.

REDUCTION OF CAPITAL
The Companies Act 2016 introduces an alternative to the existing capital reduction procedure under the Companies Act 1965. Under the Companies Act 2016, a company may reduce its share capital by:
(a) a court sanctioned procedure (s 116)
(b) a solvency test procedure (s 117)
This changes the law under the Companies Act 1965 which allows a reduction of capital only if it is confirmed by the court. The Companies Act 2016 retains this court sanctioned procedure but introduces an alternative capital reduction procedure based on a solvency test. Since the procedure for court sanctioned reduction of capital is still the same as the procedure laid down under the Companies Act 1965, the following discussion focuses on the reduction by way of a solvency test

Giving financial assistance.

The Companies Act 2016 clarifies that there is financial assistance when a company reduces or discharges any liability of a person who has acquired holding company where the liability has been incurred for the purpose of the acquisition of the shares. The directors are required to make a solvency statement that they have formed an opinion that the company satisfies the solvency test in relation to the giving of the financial assistance. Since the solvency statement must be made by all the directors, there must be unanimous agreement from the board regarding the company's ability to comply with the solvency test