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Can a Bankrupt Person be a Company Shareholder? His Rights

A bankrupt shareholder is a person - who is a shareholder of a company and who, in his personal capacity, is unable to pay his outstanding debts anymore and thereby who has been declared bankrupt by a court of law.

Insolvent and bankrupt are synonyms of each other and carry the same meaning.

A "bankrupt" is a person :

 - whose debts are much more than his assets/properties;
 - who on his own or any of his creditors have filed a petition in a court of law to declare him bankrupt;
 - after such filing of petition, whose assets details are submitted to a court-appointed trustee and administered by this trustee for selling off and dividing the proceeds among his creditors;
 - after completion of the above process, the court declares him insolvent and relieves him from payment of all of his existing debts;
 - the whole matter is processed under the bankruptcy law of the country.

Once declared bankrupt - these people are called 'discharged bankrupt'.

There is also another concept of 'undischarged bankrupt'.

An undischarged bankrupt is someone who is legally bankrupt but who still has to pay back particular debts and cannot borrow again without telling financial organizations considering a loan that they are bankrupt: An undischarged bankrupt is subject to various restrictions. (Cambridge Dictionary)

can a bankrupt person be a shareholder

Bankrupt Shareholder

So, what happens when a shareholder goes bankrupt?

The court-appointed trustee may try to pursue some persons to buy the shares of that bankrupt shareholder. If it gets sold then the proceeds of sale of shares will be utilized to pay off his debts.

If the trustee was unable to sell the shares then the name of the shareholder will continue to be in the register of members of the company and he will continue to be a shareholder, but he will have to transfer the beneficial ownership in favor of the trustee. Thereafter, in the matters of those shares, he will act as per the direction of the trustee.

Rights of a Bankrupt Shareholder (including undischarged bankrupt shareholder)

A bankrupt who is the legal owner of shares in a company - is still entitled to vote as long as his name remains on the share register. Morgan v. Gray, (1953) Ch 83

But he must vote in accordance with the direction of his trustee in bankruptcy.

Here we have to take note that - a member’s right to vote is governed by company law. His authority to vote in the event of his bankruptcy is governed by general trust principle and bankruptcy law.

Excerpts from the judgement in the case of Morgan v. Gray, (1953) Ch 83. —

“The position is very different where the company is still in operation and the bankrupt remains the registered proprietor on the company’s register of the shares which he formerly owned beneficially as well as legally. It seems to me that, unless there is some provision in the company’s articles or in the Companies Act which empowers me to say that the bankrupt is no longer a member of the company, and is, therefore, unable to vote, expressly, I must come to the conclusion that the bankrupt still remains a member as long as he is on the register; notwithstanding that by taking appropriate steps under the appropriate provisions the trustee in bankruptcy may be able to secure registration of himself as the proprietor of the shares. Unless and until that is done, and as long as the bankrupt remains on the register of the company, he remains a member in respect of those shares and is entitled, as it seems to me, to exercise the votes which are attributable to that status, notwithstanding that he has no longer any beneficial interest in the shares and that the company is entitled to pay any dividends to his trustee in bankruptcy.”


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