View/Open - Research Commons - The University of Waikato

the company‟s ability to pay its creditors. 36 The Act also provides that, if as a result
of the reduction, the company is insolvent, directors could be subjected to personal
liability for insolvent trading under section 588G of the Corporations Act 2001.
To protect creditors, the Malaysian Companies Act 1965 gives the right to every
creditor whose debt is admissible in proof to object to the reduction. 37 The same
position applies in the UK prior to the amendment in 2006 and now in addition to
proof of debt, the creditor has the burden to show the proposed reduction will put the
discharge of due debt at risk. 38 The company then has to apply to the court for
confirmation which provides further protection to creditors. 39
Prior to the amendment in 2006, creditors in the UK were in a better position than
they would have been had the reduction not been made. This is due to the law in
Companies Act 1985 which required the company to discharge or secure all
creditors‟ outstanding claims at the time of reduction.
The prohibition on the company on returning share capital to its members is
expressed in various forms in the statues. The company must not directly or
indirectly purchase its own shares; give financial assistance for the purpose of or in
connection with the acquisition of its shares or shares of its holding company; or
distribute its capital to members.
36 The section also provides that the reduction should be fair and reasonable to shareholders as a
whole and consent from shareholders is required. See section 256B of the Australian Corporations
Act 2001.
37 See section 64(2) of the Malaysian Companies Act 1965.
38 See section 646(1)(b) of the UK Companies Act 2006.
39 See section 645(1) of the UK Companies Act 2006; see section 64 of the Malaysian Companies Act
1965.
157