Sleeping Directorship, Free Shares & Guaranteed Dividends. Too Good To Be True? Part 3 & 4

Author: Tony Quah

Many entrepreneurs lack knowledge in essential business finance and structuring. This is the second instalment of a 6 part series, where we will be sharing few short stories from our past portfolios in the hope that you could avoid potential pitfalls that could cost you huge sums of money and sanity.

First instalment here in case you missed it. 

Part III

The essence of the deal was that:-

Item 2 – 20% new shares (worth RM200,000) to be issued to her, no money needs to be paid.  In 3 years’ time, the Company guarantees to buy back the shares from her at x3, = RM600,000 and she will cash out with RM400,000 profit or can stay on…. 

For the shares to be issued, most Company secretaries will require evidence of depositing of monies into the company Bank Account as it is a requirement of the Companies Act.

If the Company had loaned her money to buy the shares of the Company, it is in violation of the Law.

Assuming that somehow they record the transaction as Monies owing by Director (Ms. Ong), there is an element of Tax that has to be paid, as it is an Interest-Free Loan.

Most importantly, some shareholders mistakenly think that because the company collected money for the issuance of shares, they can sell the shares back to the company. It cannot be done even if the Director / Company issues a guarantee to that individual.

Part IV

The essence of the deal was that:-

Item 3 – In the past, the Company declare dividends annually of RM100,000; so the minimum she will receive is RM20,000 per year.

Dividends cannot be paid out from Share Capital and also the Company has been loss making. 

Furthermore, Sect 131 states “Subject to Sect 132, a company may only make a distribution to the shareholders out of profits of the company available if the company is solvent.  The Company, every officer and any other person or individual who contravenes this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding 3 million ringgit or to both.

While there is no liability on a Shareholder who receive such dividends, Ms Ong is also a Director.  Ms Ong cannot claim to be ignorant of the payment as Authorisation of Dividends is subject to Directors Approval (Sect 132).

Lastly, if the current year there is a profit, Dividends may only be paid when there is a positive shareholders fund and also the company is solvent (able to pay its debts as and when the debts become due within 12 months immediately after the distribution is made).

Read the final conclusion here …

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