Surrender My Shares? Over My Dead (Corporate) Body!

Introduction

The effects of an individual shareholder’s death, lunacy and bankruptcy on the shares held by the same can easily be ascertained as the shares are transmitted according to the testamentary documents, the Distribution Act 1958, the Insolvency Act, 1967, the Mental Health Act 2001, the Insolvency Act, 1967 etc. 

The effects of a dissolved corporate shareholder (which remains in the register of the company in question) however is less known.  

This article addresses:- 

(a) what happens to the shares of a dissolved corporate shareholder; and 

(b) whether a dissolution of a corporate shareholder could affect the subsistence of a company. 

What is Dissolution of Companies?

Dissolution of companies is the removal of the companies from the register. A company’s lifeline does not end once it has been wound up. Instead, it is after its name and records have been removed from the register at the Companies Commission of Malaysia.

How Does It Happen?

Dissolution of companies can happen in two (2) ways: firstly, upon liquidation of companies; and secondly, upon the striking out of companies. 

In respect of the winding up of companies:-

The procedures leading to the dissolution of a wound-up company are found in:- 

• Section 459 of the Companies Act, 2016 (three (3) months (or any such other deferred date granted by the Court) after the holding of a meeting with the members to account for the winding-up); and 
• Section 490 of the Companies Act, 2016 (pursuant to the order from the Court, upon an application by the liquidator). 

In respect of the striking out of companies:-

A company may be struck out pursuant to Section 549 of the Companies Act, 2016, for, amongst others:- 

(a) the company is not carrying on business or not in operation; 

(b) the company has contravened the Act (e.g. fails to lodge the necessary statutory documents with the Companies Commission of Malaysia); 

(c) the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public interest, public order, good order or morality in Malaysia.

In respect of (a) above, note, however, that a company can be dissolved if, amongst others, it has:- 

• no liabilities; 
• no active business operations (current or otherwise); 
• not subject to any pending legal cases; and/or 
• not a holding company.

What Then Happens to the Shares of a Dissolved Company? 

Properties (movable or immovable) that remain outstanding with the dissolved company after the dissolution vest in the Registrar.

Section 557(1) of the Companies Act, 2016 reads:- 

“Where, after a company has been dissolved, there remains any outstanding property, movable or immovable, including things in action and whether within or outside Malaysia which at the time it was dissolved – 

(a) was vested in the company; 

(b) the company was entitled to it; or 

(c) the company had a disposing power, 

but which was not got in, realized upon or otherwise disposed of or dealt with by the company or its liquidator before the dissolution, the property except called and uncalled capital, shall, for the purposes of the following sections of this Subdivision and notwithstanding any other written law to the contrary, be vested in the Registrar for all the estate and interest, legal or equitable of the company or its liquidator at the date the company was dissolved, together with all claims, rights and remedies which the company or its liquidator had at that time.”

Does “property” include shares?

“Property” is defined in Section 2(1) of the Companies Act, 2016 as follows:- 

“In this Act, unless the context otherwise requires – 

…

“property”, in relation to a corporation, includes land, money, goods, chose in actions, things in action, goodwill and every valuable thing, whether corporal or incorporeal, movable or immovable, and whether situated in Malaysia or elsewhere and also includes obligations, servitudes, and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to the property…”

“Chose in actions” include shares.

The Registrar is in reference to the Registrar of Companies, and not the Registrar of the High Court. [See: Mahzan bin Abdullah & Ors v Perusahaan Langat Sdn Bhd (Dalam Penyelesaian Sementara) & Ors [2012] MLJU 1151]

If a Company is Dissolved, Must You Reinstate the Company Back to Recover the Shares?

In Md Mustamam bin Lope v Suruhanjaya Syarikat Malaysia [2011] MLJU 865 (“Md Mustamam case”), a director of a dissolved company applied to the High Court to reinstate the company.  

The dissolved company owed monies to the said director.  

The High Court in the Md Mustamam case, however, held that the monies can be recovered without reinstating the dissolved company as the Registrar is entitled to deal with the assets of the dissolved company pursuant to Section 310(1) of the Companies Act, 1965 (predecessor to Section 557 of the Companies Act, 2016).

To recover the shares from the Registrar, one has to apply to the Registrar for disposal of the assets pursuant to Section 558 of the Companies Act, 2016.  

The Registrar is, under Section 558 of the Companies Act, 2016, entitled to sell, dispose of or deal with the property as he thinks fit. 

The Registrar is entitled to 30% of the proceeds from the sale, disposal of or dealing with the property. [See: Item 31 in the Schedule to the Companies Regulations, 2017]

A person applying for the sale, disposal of or dealing with outstanding properties under Section 558 of the Companies Act, 2016 may appeal to the Minister under Regulation 4 of Item 31 the Companies Regulations, 2017.

Does a Company Still Exist if its Constitution Requires a Minimum of Two (2) Shareholders? 

Yes, a company still exists even if one of its shareholders is dissolved and the number of shareholders falls below the minimum number. 

There are two (2) arguments to be made for the above.

Firstly, Section 9(b) of the Companies Act, 2016 appears to enable a company to subsist with only “…one or more members…”

Section 32(2) of the Companies Act, 2016 provides that “[t]he constitution of a company has no effect to the extent that it contravenes or is inconsistent with the provisions of this Act.”

Secondly, even if Section 9(b) of the Companies Act, 2016 cannot override the company’s constitution, so long as the dissolved corporate shareholder remains a member of the company in the said company’s register, the company is regarded to still have two (2) members. 

Section 2(1) of the Companies Act, 2016 reads:-

“In this Act, unless the context otherwise requires – 

…

“member” means – 

(a) in the case of a company limited by shares, a person whose name is entered in the register of members as the holder for the time being of one or more shares in the company; or 

(b) in the case of a company limited by guarantee, a person whose name is entered in the register of members…”

From the aforementioned provision, the membership of a company depends on its register of members. 

In Randhawa and another v Turpin and another (No 2) [2017] EWCA Civ 1201, the English Court had the occasion of determining whether a corporate shareholder ceases to be a member upon its dissolution.

Sir Geoffrey Vos C held that:

‘That is clear from each of section 112(2) which provides that “every other person… whose name is entered in its register of members, is a member…”‘

Conclusion

The first law of thermodynamics dictates that energy can neither be created nor destroyed; it can only be transferred or changed from one form to another.  Similarly, the death, lunacy, bankruptcy or even dissolution of a shareholder does not generally negate the existence of shares issued.