If you are a shareholder in a private limited company that is facing the possibility of failure, then it is important that you understand your rights and obligations. While shareholders will not usually be liable for company debts or have any specific duties if a company is wound up, there are situations in which personal liability and statutory obligations may arise. For this reason, it is vital that you take legal advice on your position so that you know where you stand and can make informed decisions about what to do.
Michael Clinch, insolvency expert with Ingram Winter Green explains more.
What are the rights of shareholders on insolvency?
The rights of shareholders on insolvency vary, depending on the type of shareholding you have, the terms of the company’s articles of association, the terms of any shareholders agreement that is in place, and whether – in addition to your shares – you have made any further investment in the company, such as through the provision of a loan.
As a general rule, where you have an ordinary shareholding you should not expect to receive any return on your initial share investment once a company has been placed into liquidation. This is because, in terms of priority, you will be bottom of the list when it comes to receiving a share of any assets that are realised during the liquidation process. The payment of outstanding debts and liquidation expenses will have to be settled first, and it is only if there are any surplus funds available that a distribution will then be made to shareholders in accordance with their shareholding – with preferential shareholders usually paid first.
Where, in addition to your initial investment, you have also loaned money to the company, the extent to which you can expect this to be repaid depends on whether or not the loan was secured. This is because company debts must be settled in the following order of priority:
- fixed charges;
- winding-up costs;
- preferential debts;
- floating charges; and
- unsecured creditors.
Your position will be different where you have obtained a personal guarantee from one or more of the company’s directors, as in this situation you will have the right to pursue them for any loan monies that are owed where there are insufficient company funds available.
What are the obligations of shareholders on insolvency?
As a general rule, shareholders do not have any obligations during the insolvency process. That said, where you have acquired shares in a company which you have not yet paid for, then you will be required to pay- the monies that are due in accordance with your liability for the shares.
You are not obliged to force the company to be wound up where you suspect that it may be insolvent, as responsibility for this decision will usually rest with the directors. However, it may be possible for you to force a winding up where you can get 75% (in value) of the shareholders to support you, or where you can convince a court that the company cannot pay its debts and should therefore be shut down.
What are the liabilities of shareholders on insolvency?
Shareholders do not usually have any personal liability for company debts over and above the value of their shareholding. However, personal liability may arise where you have given a personal guarantee for a company debt or where you are guilty of fraudulent activity in relation to company assets or company business.
Personal liability may also arise where, as well as being a shareholder, you are also a company director and you have been found guilty of an offence under the Insolvency Act 1986. This may be the case where, for instance, you have:
- continued to allow the company to trade, despite knowing that a financial collapse was inevitable;
- transferred company property to yourself or to a third party for less than market value or for no consideration;
- paid a dividend to shareholders at a time when you knew, or ought to have known, that the company was insolvent; or
- decided to repay monies owed to certain ‘preferred’ creditors in order to ensure that they fared better than other creditors following the company’s collapse.
Are there any Covid related issues to bear in mind?
Where a company has taken advantage of Covid-related financial support, for example by applying for a bounce-back loan or making use of the government furlough scheme, then steps may be taken to check for fraud if the company subsequently becomes insolvent.
This is something that may impact shareholders, and specifically director-shareholders who have been complicit in helping a company to dishonestly obtain financial support or who have orchestrated the collapse of a company to avoid having to meet repayment obligations.
Contact us
For further information, and tailored advice on your rights and responsibilities as a shareholder, please contact Michael Clinch on 020 7845 or send an email to michaelclinch@iwg.co.uk.
We can help you to determine whether you have preferential shareholder rights, advise you on your options for recovering a secured or unsecured loan, help you to enforce or defend a personal guarantee claim, support you through a HMRC investigation where Covid-related fraud is alleged and advise you on your options where you are a director-shareholder who is accused of an Insolvency Act offence or who is facing director disqualification proceedings.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.