PROBIHITION ON COMPANY PURCHASING ITS OWN

SHARES.

Trevor v Whitworth (1887) 12 App Cas 409; [1886-90]. All ER Rep 46, HL.

Mookapillai & Anor. v Liquidator, Sri Saringgit Sdn. Bhd. & Ors. (1981) 2 MLJ 114.

Trevor v Whitworth (1887) 12 App Cas 409; [1886-90]. All ER Rep 46, HL.

• The company was formed in 1865 to take over the business of James Schofield & Sons. By the articles of association the company were empowered to purchase their own shares for the purpose of selling them again or of extinguishing them, but no such power was given by the memorandum of association.

• Later, the executor of the deceased shareholder of the company sold the deceased’s shares to the company. Half of the share's price have been paid and the remaining amount are allowed to be paid by second installments. The remaining amount of unpaid shares bearing 5 percent interest.

• However, prior to the payment of second installment, the company went into liquidation.

• The executor claimed the balance from the company’s liquidator by objected to the respondents whose ranking as creditors.

• The court held that the respondents were not entitled to rank as creditors in respect of the remaining sum ie a company had no power to purchase its own shares even if its articles of association permits.

• Here, the court addressed 3 issues:

1. Whether certain shares of the deceased purchased by the respondent on his own account or as an agent of the company.

The answer is the transaction entered into by respondent was made on behalf of the company.

2. Whether, assuming the company had power to purchase its own shares, this purchase was affected in accordance with the articles of the company.

Articles of the company empowering the company to purchase its shares whereby the shares may be purchased by the company from any person willing to sell it at such price, not exceeding than the marketable value thereof, as the board think reasonable. The judge did not give an opinion upon this area.

3. Whether the company have the power to purchase the shares.

The memorandum of association of the company only admitted but does not authorize the purchases by the company of its own shares. Thus, a company by its articles of association cannot extend its power in this respect.

Mookapillai & Anor. V Liquidator, Sri Saringgit Sdn. Bhd. & Ors. (1981) 2 MLJ 114

Fact of the Case:• The minority shareholders originally applied

for the purchase of their shares by the company or for the company to be wound up. An order was made for the company to be wound up and a liquidator appointed. The liquidator took steps to sell the rubber estate belonging to the company.

• Subsequently the appellants applied for a stay of the execution. An agreement was arrived at between the majority and the minority shareholders the effect of which was to provide that the company would purchase the shares of the minority shareholders for estimated RM 1.2 million

and for a reduction of the paid up capital of the company and that the company would raise the stipulated sum by a mortgage of its assets. The learned trial judge dismisses the application and directed the liquidator to proceed with the sale. The appellants appealed.

Held :• Section 67 of the Companies Act 1965 clearly

prohibits excepts as is otherwise expressly provided by the Act the purchase by a company of its own shares or any direct or indirect financial assistance by it for the purchase of its shares.

In this case, there was a prayer for an order for reduction of capital without going through the essential requirements laid down in Sec 64 of the Act for a special resolution and the other requisite preliminaries. The provisions of Section 64 and 67 of the Act therefore applied to preclude the order sought

• In this case the liquidator had been going on for a considerable time and the sale by the liquidator of the estate was virtually completed and therefore the learned judge exercised his discretion under Section 243 of the Act correctly in refusing the application for a stay and the other orders sought.

The EndThank you