Does Failure to Distribute Dividends is Considered as Oppression?

We have assisted numerous clients with company and corporate issue:

What is Dividend(s)?

Dividend(s) are profits/ retained earnings that a company generates and pays out to its shareholders. In this regard:

  1. The value of the dividends that are paid out to its shareholders are determined on a per-share basis; and
  2. There are no set rules as to when the dividends will be paid out (as we will find out below).

The Law in Regards to Dividend

What is the prerequisite to distribute dividends?

  1. Before distributing dividends, the company needs to make sure that the dividends are paid out of the available profits of the company (assuming the company is solvent)1.
  2. The dividends can only be paid only after the directors have authorized the distribution2, provided that the company will be solvent immediately after the distribution is made3.

How do the directors of the company determine whether the company will be solvent immediately after the distribution?

The company is regarded as a solvent if the company is able to pay its debts as and when the debts become due within 12 months immediately after the distribution is made4.

Can the directors of the company make a u-turn on their decision?

Yes. The law provides that if, after a distribution is authorized and before it is made, the directors cease to be satisfied on reasonable grounds that the company will be solvent immediately after the distribution is made, the directors shall take all necessary steps to prevent the distribution from being made5.

The effect of non-compliance with the rules stated above.

Anyone who does not comply with the above rules, if convicted, shall be liable to imprisonment not exceeding 5 years or a fine not exceeding RM3,000,000.006.

Can a Shareholder of a Company Sue the Company for Oppression if the Company Chooses not to Distribute its Dividends?

First and foremost, what is oppression? Simply put, oppression is an act whereby the action of the company (against their shareholders) departs from the standard of fair dealing and violates the conditions of fair play that a shareholder of the company is entitled to expect as a shareholder of the company.

So can the shareholders sue the company for oppression? The answer is both yes and no- it all depends on the circumstances of each case. Below are certain circumstances (whilst not exhaustive) in which the shareholder can/ cannot sue for oppression.

Circumstances in which the Shareholder Can Sue for Oppression

  1. When the discretion to distribute dividends was not exercised in a manner that is fair or honest. For example, the discretion was exercised to deny the preferential shareholders their rights for a collateral purpose7.
  2. When the non-distribution was done to push the minority shareholders8.
  3. When the majority shareholders, who so happened to also be the directors, receive excessive payments (in the form of director fees and emoluments), leaving the company coffers high and dry and as a result is unable to declare dividends9.

Circumstances in which the Shareholder Cannot Sue for Oppression

  1. When it can be demonstrated that the company was run in a way to show that the assets/ monies being acquired were being invested wisely for the benefit of the shareholders10.
  2. When the company can show that the company is not making any profit11.
  3. Even assuming that the company can show profits, it does not necessarily mean that the company is oppressing its shareholders, provided that the company can show that the discretion to declare dividends is done properly and that there is no common understanding between the company and shareholders in regards to the distribution of dividends12.

Read more about What is Shareholder HERE.

Read more about The Do’s and Don’ts of Company Director HERE.

We have assisted numerous clients with company and corporate issue:

1. Section 131(1), Companies Act 2016.
2. Section 132(1), Ibid.
3. Section 132 (2), Companies Act 2016.
4. Section 132 (3), Ibid.
5. Section 132(4), Ibid.
6. Section 131(2) and Section 132(5), Ibid.
7. Re SQ Wong Holdings (Pte) Ltd [1987] 2 MLJ 298.
8. Re Gee Hoe Chan Trading Co Pte Ltd [1991] 3 MLJ 137.
9. Wong Shee Cheong & Anor v Lee Industries Sdn Bhd & Ors [2011] 1 LNS 666.
10. Lee Ah Kong @ Lee Muk Sang v Wings Logistic Sdn Bhd & Anor [2015] 7 MLJ 408.
11. Ghanesh Periasamy & Ors v Glamjaya & Ors [2017] 1 LNS 1897.
12. HS Wang Holdings Sdn Bhd v Borneo Pride Sdn Bhd.