It is important for any director or shareholder to understand the risks - and know what action to take - in the event that insolvency of the company is likely. We have been advising directors and shareholders since 2002. Let us help you too.

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A company director we successfully defended against disqualification

Shareholders risks on insolvency

When a limited company faces insolvency, shareholders are in the privileged position that their liability to company’s creditors are limited to the value of their shareholding. This means that, unless there has been a particular instance of misconduct by a shareholder acting as a director (see below), an insolvency practitioner appointed over the company will not be able to come after a shareholder for any more money, and neither will a company’s creditor.

However, the downside of insolvency from a shareholder’s point of view can also be significant.

Shareholders who rely on dividends for income will also lose out in insolvency. In an insolvency situation the company will cease to trade and therefore the company will not be in a position at any time in the future to declare profits and therefore declare dividends.

Repayment of share capital

A shareholder may have invested significant capital into a company. On an insolvency situation, there is a statutory priority order to be followed setting out who is to be repaid out of available company assets. Unfortunately for shareholders, they are always at the bottom of this list.

When a company is insolvent, it is rarely able to repay its debts in full. If creditors are not repaid in full, then in practice this means that shareholders won’t be repaid their investment. If they are lucky enough that there are some surplus funds available for shareholders after repayment of everyone else, repayment of the whole of their investment is very unlikely.

Shareholders as creditors

If a shareholder has incurred losses as a creditor however (outside of share capital invested), then they will be able to submit claim as a creditor. For example, if they have lent money to the company they can claim as either a secured creditor, if security has been provided, or as an unsecured creditor.

Risks to shareholders who act as directors

If a shareholder is also a registered director, then the limited liability protection will only be afforded on the basis that they have not been culpable of misconduct and breached any of their director’s duties.

If a director / shareholder has breached duties, then an insolvency practitioner may take proceedings against the director or directors guilty of the misconduct in order to reclaim some monies back into the company for the benefit of the creditors as a whole. These are known as ‘antecedent transactions’ and form part of a number of claims against directors.

There are many ways in which an insolvency practitioner can recoup monies back into the company following a breach of duty by directors.

By way of an example, an insolvency practitioner may bring a claim against a director for wrongful trading.

  • wrongful trading is when a director knew or ought to have known that the company was insolvent and yet allowed the company to incur extra credit during this time;
  • a director in this circumstance may be ordered to personally repay to the company any monies incurred by the company by way of credit during the period of wrongful trading;
  • these can be quite substantial.

Directors disqualification

In addition, any directors (or people acting as directors) may also be disqualified as company directors for anywhere between 2 and 15 years, depending on the misconduct found against them.

Recent changes in disqualification law means that it is also possible for the court to order that the director that has been found to have been guilty of misconduct should also make a compensation order to the company for the benefit of the company’s creditors.

Shadow & de facto directors

The remedies above are applicable where somebody is a director. However, you do not need to be a registered director for a remedy such as this to apply to you. It is frequently found that a shareholder that takes an active role in the company may be considered to be a director, and is therefore equally subject to the risk of personal liability as a registered director and subject to all disqualification remedies.

Read more here about the types of directorship that a shareholder might undertake and what is a director is.

Shareholder remedies against directors in the event of insolvency

A shareholder who has invested a significant amount of money and loses this on a company’s insolvency might feel particularly aggrieved and wish to pursue remedies against directors that they believe have been guilty of misconduct, particularly if they think this misconduct led to the company becoming insolvent, or to the company having significantly less assets than they would have had the director not been guilty of misconduct, such as diverting assets.

An insolvency practitioner will only take proceedings against a director if they have sufficient funding to do so, and if they are sure that this will bring money back into the company for the benefit of creditors. This might mean that even if they believe that a director has breached one or more duties and that there is a legitimate claim against that director, if that director has no money available to repay the company, then in practice it is unlikely that the insolvency practitioner will pursue them.

Assignment of claim

In certain circumstances an insolvency practitioner may be able to assign a claim to an interested party, including a shareholder who believes that a director should be targeted for breach of duty.

A shareholder must be aware however, that the benefit of any monies repaid following a successful claim will not be used solely for their own repayment. These funds will go back into the company to repay creditors in the standard priority order. This might mean that the shareholders will remain unpaid, depending on the sums.

If you are a shareholder of a company in an insolvency situation then contact our expert team at Francis Wilks & Jones as soon as possible. We may be able to help you reclaim some or all of the monies outstanding to you, and can advise on the chances of a successful claim against the company or directors if appropriate.

Francis Wilks & Jones were responsive, available at all times to deal with any of my queries and very reassuring. I would definitely recommend them to deal with proceedings brought on behalf of shareholders – they understood our practical needs

A shareholder we helped bring unfair prejudice proceedings against a fellow shareholder who had been interfering with the management of the company and damaging its value

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