Question

Jamal, Jong and Jacob are the directors of Kosain Bhd (“Kosain”). The business of the company is to offer management and consultancy services. Each of the directors holds 10% of the company’s issued share capital. The remaining of the shares is held by Jesvin who is also the accountant of the company. Recently, the company decided to issue new shares to all its shareholders. In the light of the current financial crisis, the company set up an employee share scheme, offering a loan to all its employees to take up the shares:

a. The Board of Directors, Jesvin and the employees were offered the loan to take up the shares of the company. However, Jesvin claims that the offer is in breach of the law. The Board of Directors seeks your advice.

b. Recently “Kosain” contracted to buy a piece of land from Erica. The market value of the land is RM 350,000. However, “Kosain” bought the property at RM 500,000, which is above the market value. Two weeks later, Erica bought a huge number of shares in Kosain. Jesvin is unhappy over the matter. Jesvin claims that the company is in breach of the law. The Board of Directors seeks your advice.

Answer 1

My advice to the Board of Directors of Kosain Bhd about the doubts raised by Jesvin about a possible breach of law are as below:

a) Jesvin is right about the breach of law in this case The Malayasian law quite clearly prohibits a company from giving loans for buying its own shares. Section 67(1) of Malayasian Companies Act, 1965 provides that:

"No company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, or the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or where the company is a subsidiary, in its holding company or in any way purchase deal in or lend money on its shares".

However, the rule framed in 67(1) is not absolute and is subject to certain exceptions which are given in section 67(2). Section 67(2)(c) of Malayasian Companies Act allows a company to give financial assistance to persons other than directors, who are bona fide in the employment of the company, for the purchase of fully paid shares in the company to be held by themselves by way of beneficial ownership.

Hence, Jesvin is right about Kosain Bhd being in clear breach of law by violating the provisions of Section 67(1) of Malayasian Companies Act, 1965 due to its offering loans to its directors for buying its own shares. However, as permitted in section 67(2)(c), the company can go ahead with its plan to set up an employee share schem and offering a loan to its bona fide employees to buy its shares.

b) The ramifications of Section 67(1) are applicable in this case also. The provisions contained in Section 67(1) impose a clear and wide prohibition that a company cannot, in any manner whatsoever, purchase, deal in or lend money against its own shares. Please mark the wording of Section 67(1) "No company shall give, whether directly or indirectly... any financial assistance...in connection with a purchase...to be made by any person for any shares in the company"

Hence, any financial assistance given by a company, whether directly or indirectly, with the intention of dealing in its own shares is explicitely prohibited in Section 67(1) . It is apparant from the case that the excess price of RM 150000 (RM 500,000 - RM350,000) paid by Kosain Bhd to Erica for buying a piece of land from her is clearly an inderct financial assistance given by the company for the purpose of buying its shares. This is a clear violation of Section 67 (1) of Malayasian Companies Act, 1965.  

Hence, Jesvin is right about Kosain Bhd being in clear violation of Malayasian law in this case also.