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Shareholder Responsibilities  for Insolvent Companies

Shareholder Responsibilities for Insolvent Companies

A shareholder has limited responsibilities towards their company. Find out how shareholder responsibilities apply to insolvent companies here.

28th July 2020
Reading Time: 3 minutes

Shareholders have a very limited responsibility towards a company. Even when a company becomes insolvent, the shareholder responsibilities remain limited.

Insolvent Companies

An insolvent company is a company that is unable to pay its creditors. Insolvency results in an external administrator being appointed. The two most common forms of external administration are liquidation and voluntary administration. 

In liquidation, a liquidator ‘winds up’ the company. This involves collecting and realising assets, preparing financial reports, and distributing the assets to the creditors. An insolvent company must first satisfy its creditors. The shareholders receive payment after the creditors. The shareholders may also receive other compensation such as dividends. If there are unpaid or partly paid shares, the liquidator can demand that the shareholder pay the due amount. Shareholder’s are also restricted from selling their shares. The liquidator must approve or consent to the sale or transfer to the assets. For a more comprehensive guide on liquidation, visit our guide ‘What Does It Mean When a Company Goes Into Liquidation?‘.

In voluntary administration, a voluntary administrator controls the company to resolve the company’s debts and save the business. The aim is to provide a better return to the creditor than they could have achieved under liquidation. The voluntary administrator has total control during insolvency and shareholders are unable to vote on the future of the company. Similar to liquidation, a voluntary administrator must approve or consent to a sale of shares by a shareholder during insolvency. You can find more comprehensive information about voluntary administration here.

Shareholder Responsibilities  

Solvent Companies

In a solvent company, shareholder duties included the approval of financial statements, declaring dividends, and changing the constitution of the company. The shareholders may guide the management of a company by voting on resolutions. Shareholders pass resolution in shareholder meetings. Shareholder’s may pass resolutions based on ethical reasons. This is known as shareholder activism. For example, shareholders may refuse a certain project on the basis that it is harmful to the environment, it takes advantage of poor working conditions or that it is not socially responsible.  

Insolvent Companies

When it appears that a company might be insolvent, directors and shareholders must pass a resolution for the ‘winding up’ of the company. The director must notify ASIC of the decision to ‘wind up’ the company. Further, any decisions about appointing a liquidator or a voluntary administrator must also be notified to ASIC.

Once the company is insolvent, a shareholder has very limited responsibilities. A company is a seperate legal entity to its shareholders. As a result, a shareholder is not personally liable for the company’s debts during the insolvency process. A shareholder is only liable for the unpaid amount on their shares. However, this may increase if a shareholder is a guarantor or an indemnifier for a company debt.

In comparison to a solvent company, a shareholder has less responsibilities during the process of insolvency. This is because the liquidator or a voluntary administrator will conduct many of the duties of a shareholder. The liquidator or voluntary administrator prepares the financial statements. Shareholder’s do not need to approve the financial statements. They also do not declare a dividend during insolvency. Further, the voluntary administrator is able to change the company constitution.

Director’s Responsibilities

Shareholder responsibilities can be contrasted with a director’s responsibilities in an insolvent company. During insolvency, a director must comply with their duties more stringently and with more care. Failure to act properly may result in a suit of wrongful trading by a creditor. This may make the director personally liable for some of the debts. One of the major responsibilities of a director to an insolvent company is to ensure that the company stops trading and recovers its assets for the creditors. It is the director’s responsibility to ensure that the company does not deliver any more goods, pay its employees, or seek finance.

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Author
Meru Sharma

Meru is a legal tech intern at Lawpath and a Bachelor of Laws student at The University of Technology Sydney. He is interested in how technology can help bring the legal industry into the 21st century.