When a company is in financial difficulties we are usually instructed by directors or creditors of the company. However, often shareholders will also concerns as to what their role is when a company is in financial difficulties. We set out below some information that may assist.
For shareholders as well as directors, it is important to protect your own position, as well as that of the company, when it starts to experience financial problems.
If a company requires business rescue, then it may be approaching insolvency. The earlier both shareholders and directors take advice, the more options are open to it in order to rescue the business. The later professional help is taken, then the closer a company will be to an irretrievable position and a formal insolvency procedure.
Level of shareholder involvement
There are essentially two different types of shareholder
- part of a small shareholding, for example in a family business, where the shareholders hold a significant amount of shares among just a few shareholders
- a large company where there may be many smaller shareholders with lower value shareholdings where the shareholding is not as vital to the shareholder as in the example above.
Where shareholders have a significant interest in the company, then they will be keen to get an understanding of the problems within the company and to address these whether they are directors or not.
If a company does reach a final insolvency process then shareholders always rank at the bottom of the order of priority of payment below everyone else. Therefore, it is in the interests of shareholders to try to avoid this situation and bring about a business rescue as far as possible.
Shareholders liability for debts of a company
In simple terms, the shareholders liability only extends as far as the shares they own. If they remain simply shareholders then they will not be responsible for any debts of the company save for the amount of their unpaid shareholding.
However, in smaller companies where the shareholders have more interaction with the company, they might need to be more mindful of their position.
- if a shareholder also sits on the board of directors then they will of course have the same duties as directors to act in the best interests of creditors of the company once insolvency is on the cards, and failure to do so can potentially lead to personal liability and/or disqualification as a director.
- even if a shareholder is not formally a director, if they exercise close control over the company’s activities for a significant period then they risk being classed as a shadow director – which is a person in accordance with whose directions or instructions the company directors are accustomed to act. Or they could be seen as a de facto director – which is where on the face of it anyone dealing with the company might reasonably believe that the shareholder is in fact a director. If that is the case, then they can have the same personal responsible as formally appointed directors for matters such as wrongful trading or fraudulent trading etc.
How to protect your position
The key for any involved shareholder is to take expert business rescue advice as early as possible. An expert will be able to suggest methods of business rescue that will avoid formal insolvency and maintain the value of your shareholding.
Shareholders should make sure that they regularly review the company’s accounts, including forecasts. They should maintain a dialogue with the directors so that they are very clear on the true situation of the company at any one time, and whether action needs to be taken. Remember, as a shareholder, if the company enters formal insolvency proceedings then it is very unlikely you will be repaid your shares.
If you are a shareholder of a company that you believe may be experiencing financial difficulties, then our team of business rescue lawyers can talk to you about your various options and how best to protect your position as a shareholder. Contact us today to discuss.