What Are Shareholder Rights In Liquidation?

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When a company enters liquidation, the priority is placed on repaying the debts of creditors. What does this mean for shareholders and where do their interests fit into the process? 

Shareholder rights in insolvency will vary depending on a range of factors. This includes:

  • The type of shareholders e.g preference or equity shareholders
  • The terms of any shareholder agreements (we’ll explain this in more detail in just a second)
  • Articles of Association
  • Any additional investments in the company that have been made by the shareholder

Whilst shareholder rights will vary slightly depending on the individual circumstances of the company, as a general rule of thumb, regular shareholders should not expect to see a  return on their investment when the company is placed into liquidation. This is due to the hierarchy of repayment in insolvency, which sees shareholder rights placed at the bottom of the ladder. Once assets are realised during the liquidation process, they are shared out in an order of repayment that prioritises creditors. Outstanding debts and liquidation costs will be settled before any leftover funds (if there are any) are distributed to shareholders, with preferential shareholder rights taking priority. 

The order of repayment sees shareholders given the least priority, as follows:

What’s The Significance Of A Shareholder Agreement?

Unlike the Articles of Association in a business, a shareholder agreement isn’t legally required, however it is strongly recommended in order to prevent conflict in the event of insolvency, and to protect the interests of shareholders. The agreement outlines how potential conflicts should be resolved by deciding on key actions including shareholder rights & duties (including the rights of minority shareholders), voting powers, governance issues and exit strategies. If a company has made a contractual agreement like this, it will play a big role in determining shareholder liquidation rights in the event of insolvency.

What Are The Liabilities Of Shareholders In Insolvency?

Generally speaking, shareholders should not have personal liability for any company debts. Shareholders are protected by ‘limited liability’ meaning that they are only responsible for company debts up to the value of their shares. The only instance in which they may be made personally liable for debts is if they have provided a personal guarantee or have committed an offence under the Insolvency Act 1986. Examples of this may include disposing of company assets below market value or raising funds to repay creditors via fraudulent means. 

Can A Shareholder Force A Company Into Liquidation?

When discussing shareholder rights in liquidation, a common question that people ask is ‘can a shareholder force a company into liquidation?’. When a business becomes insolvent the responsibility for winding up the affairs of the company lies on the shoulders of the directors and not the shareholders. That being said, a shareholder can force the winding up of a company if they can get 75% of the shareholders to vote in support of this at the meeting of shareholders

If you would like any further information regarding shareholder liquidation rights, or if you are in need of further assistance regarding an insolvency matter, please don’t hesitate to get in touch with our experienced team of licensed insolvency practitioners today.

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