Seah Teong Kang v Seah Yong Chwan [2015] SGCA 48

On 10 September 2015, the Singapore Court of Appeal issued a judgment in Seah Teong Kang v Seah Yong Chwan on section 259 of the Companies Act. Section 259 provides:

“Any disposition of the property of the company, including things in action, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court shall unless the Court otherwise orders be void.”

Section 259 contains two prohibitions after the commencement of the winding up of a company. The first prohibition against dispositions of company property is well known.

However, the second prohibition against transfers of company shares has received comparatively less judicial or academic attention. The Court of Appeal decision in Seah Teong Kang v Seah Yong Chwanbrings welcome clarification in this regard. Section 259 only prohibits a transfer of legal title to shares, but not a disposition of beneficial title to shares.

Background

The appellant was the wife of a deceased testator. The respondent was the testator’s son.

In his will, the testator had left a specific gift of shares in a company to the respondent and other beneficiaries (collectively, the “Specific Legatees”).

When the testator died, the company was in winding up. A liquidation surplus was declared in cash. In giving effect to the will, the executor did not transfer the testator’s shares to the Specific Legatees or register them as shareholders. Instead, he distributed the testator’s share of the liquidation surplus to the Specific Legatees in cash, according to their respective shares under the will.

The appellant was the residuary beneficiary of the testator’s estate. If the respondent’s gift failed, she stood to gain as residuary beneficiary. In 2013, she commenced proceedings to challenge the validity of the respondent’s gift of shares. The Singapore High Court dismissed the appellant’s action in December 2013, and the appellant appealed to the Singapore Court of Appeal in January 2014.

Section 259 of the Companies Act - Parties’ arguments

In the Court of Appeal, the appellant’s principal argument was based on section 259.

It was not disputed that there had been no court approval for a transfer of the company’s shares under section 259. Based on this, the appellant argued that no interest whatsoever in the shares could have been transferred to the Specific Legatees. If the Specific Legatees did not acquire any interest in the shares, they were not entitled to receive any liquidation surplus representing their respective portions of the shares either. Accordingly, the gift to the Specific Legatees failed.

The respondent advanced two main arguments in response.

First, the purpose of section 259 was to prevent shareholders from evading liability on share calls by transferring their unpaid shares to third parties after winding up. That rationale was inapplicable on the facts as all the shares had been paid up.

Second and alternatively, section 259 only prohibits a transfer of shares which occurs as a result of a voluntary act of the parties, and not a transmission which takes place by operation of law. A specific legatee of shares acquires his beneficial interest in the shares when the executor assents to the gift provided in the testator’s will. This occurs by operation of law to give effect to the provisions of the will. The transaction was therefore a transmission, and not a transfer - and thus not caught by section 259.

Court of Appeal’s decision

The Court of Appeal (comprising Chief Justice Sundaresh Menon, Judge of Appeal Chao Hick Tin and Judge of Appeal Andrew Phang) rejected the appellant’s argument, and accepted both the respondent’s arguments.

The Court of Appeal held that the purpose of section 259 is sufficiently served by avoiding a transfer of the legal title to the shares. The provision only prohibits new persons from being registered as fresh shareholders in place of the existing shareholders, so that the existing shareholders would remain liable for unpaid share calls as registered shareholders.

However, the existing shareholders are allowed to transact with their beneficial interest in the shares. The Court of Appeal approved a line of English and Singapore authorities upholding sale and purchase agreements for company shares, even after a company had gone into winding up.

On the facts, the respondent acquired the beneficial interest in the shares after the executor paid out the liquidation surplus to him. This was an application of the equitable doctrines of assent and transmission. The respondent was thus entitled to the liquidation surplus, even though the shares had not been registered in his name. Section 259 did not defeat the gift.

Practical implications

This decision provides welcome clarification on the scope of section 259 and its potential impact on share dispositions after a company goes into winding up.

For example, purchasers of company shares may, after entering into the sale and purchase agreement, find that the company is in liquidation. This decision makes it clear that section 259 will not affect the validity of such transactions. Beneficial title to the shares and the dividends can still be passed notwithstanding section 259.

Section 259 only prohibits the registration of shares in the name of the new purchaser without court approval. Ordinarily, court approval will not be denied if the share capital has been paid up. This is because the purpose of section 259 is to prevent existing shareholders from transferring shares to impecunious third persons to avoid liability on share calls. If the shares are paid up, then court approval will ordinarily be granted.