Corporate Law

1.0 Introduction

Share Capital

Shareholders will become the owners of the company when shareholders invested money into the company. The amount that is contributed by shareholders is known as share capital. Moreover, the amount of monies invested by the shareholders will become the property of the company. Under Section 2(1) Companies Act 2016, shares are defined as authorized share capital of a corporate form that has been issued to shareholders. Issued share capital comprises of paid-up share capital which means the payment of the amount of issued capital that has been made by the shareholders and unpaid share capital which is residual amount after payment by the shareholders. Their liabilities are limited to the amount of unpaid shares. This means that shareholders are not debtors to the company as they will not be liable for the company’s debts and liabilities. So, the shareholders can enjoy their limited liability without giving their personal assets to cover the liabilities of the company. There are types of shares such as equity share and preference share. Equity shareholders are also known as ordinary shareholders are entitled to the residual interest of the company after the preference shareholders who hold no right to vote and to participate in any meetings under Section 2(1) Companies Act 2016 if the company is in the course of winding up. They are also entitled to get the dividend out of profit which is not mandatory unless it is declared by the company. With these statements, indicate that shareholders are not debtors to the company and therefore share capital is not a liability. There may have a risk of dropping value of shares. If the share price of the company goes up, shareholders will gain return by selling their shares; if the share price of the company goes down, they will lose money. Shareholder may need to bear the risk of depreciation value of shares in the future if the share price deteriorates. Shareholders sometimes are willing to bear the risk as they may have the chance of gaining a high return.

Loan Capital

Under Section 21(1) Companies Act 2016, a corporate form can have the right to run business or activity and to do any act such as entering into a transaction. Referring to this section, a company may have the power to purchase a property and get financed through the way of borrowing money from the financial institution. In loan capital, the individual who borrows money to the company will be the lender or creditor. Loan capital is an indication of the aggregate amount owed by the company. There are sources of loan capital such as issuing debentures and creating charges on company’s asset. Interest is compounded throughout the period of getting financed from loan capital. The company must repay the amount owed and the interest to other companies such as bank and finance company regardless of the status of the financial position of the company. For instance, a company must repay the amount owed to loan holder nonetheless the company may be facing going concern issue. Therefore it is a liability to a company and a responsibility to repay the liabilities that have been stated in the agreement. The debentures are redeemable by the company in use of their business. The loan capital usually carries no voting rights and may have priority over common stock in the respect of receiving payment and upon liquidation.

1.1 Recommendation

The issue in this case is whether Hassan, Harjeet and Henry need to raise the working capital through the loan capital or share capital in order to have more capital to enlarge their business. In my opinion, they should raise the required working capital through share capital rather than loan capital.

First of all, “Restaurant 1 Malayisia” had been published on a travel website which listed on the “Top 10 Must Try Restaurant in Kuala Lumpur in 2017” which is under a company named “ 3 Bros Berhad “ owned by Hassan, Harjeet and Henry. Therefore, the restaurant have some reputation and famous in Kuala Lumpur. In other words, the company had a stability business to expand their restaurant because the restaurant commenced the business 3 years ago. Hence, the 3 shareholders can directly invite the public to subscribe its securities through issuing prospectus. It is also known as public offer. Members of the public will directly receive the securities that they have applied to subscribe from the company after they respond to the company’s prospectus.

Since the restaurant has been operating for 3 years therefore, all the shareholders are considered to be expert in running the restaurant business which means they can manage well in the business if they expand the business. Furthermore, the Restaurant 1 Malaysia have some reputation and famous in this field due to the restaurant had strong customer base.

In a nutshell, the 3 shareholders should raise the working capital by share capital. This is because the restaurant had strong customer base so that the company can issue shares which means the company can easily attract the investor to buy the shares in 3 Bros Berhad. In other words, the 3 shareholders can directly invite