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7.3.3.1 Directly or Indirectly purchase Its Own Shares
The common law position is very strict, and a company is prohibited from
purchasing its own shares even if it is allowed to do so in its Constitution or
authorised by shareholders in the general meeting. 40 The underlying principle for
such prohibition is that by purchasing its own shares a company is using its own
financial resources and it is equivalent to reducing its own capital. 41 Lord Hershell
commented that the stringent procedures required in order to reduce share capital
would be futile if companies were allowed to purchase their own shares. 42
The common law position is incorporated in the statute and a company is prohibited
from purchasing its own shares except otherwise provided for in the statute. 43 Since
purchasing its own shares amounted to depleting the company‟s assets, the law has
laid down strict procedures that need to be complied with. 44 Section 257A of the
Australian Corporations Act 2001 permits the purchase if it does not materially
prejudice the company’s ability to pay its creditors. (Emphasis added).
The requirement is related to the company‟s solvency and directors may be subjected
to personal liability under section 588G if conditions stated therewith have been
fulfilled. In Malaysia, in addition to the stringent procedures, there must be a
solvency declaration by the directors that the company is solvent at the time of
40 Re Exchange Banking Co, Flitcroft’s Case (1882) 21 ChD 519 at 533.
41 Trevor v Whitworth (1887) 12 App Cas 409.
42 Trevor v Whitworth (1887) 12 App Cas 409 at 416.
43 See section 658(1) of the UK Companies Act 2006; section 67A of the Malaysian Companies Act
1965; section 257A of the Australian Corporations Act 2001.
44 Section 690 of the UK Companies Act 2006; the procedures are laid down in Chapter 4 of the Act;
Part 2J.1 Division 2 of the Australian Corporations Act 2001.
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