Insolvency across stakeholders: shareholders

Company Insolvency     |     June 7, 2016

Shareholders are sometimes left in the dark when a company is becoming insolvent – this is why it is especially beneficial for shareholders to reach out and get advice from a professional advisor.

Getting the info

While shareholders can be affected by insolvency in many ways, as limited information is able to be given by the external administrators, it can be hard to know what the right path to go down is.

According to the Australian Securities and Investments Commission (ASIC), while, in some ways a shareholder may claim as a creditor, for the most part shareholders cannot transfer shares in the company without permission, both from the external administrator or the Court.

This is because when a company is placed into liquidation or administration, shareholders rank behind creditors.

Capital losses

In some situations, a shareholder of an insolvent company can realise a capital loss, according to ASIC. There are two situations where this may occur.

One, if a liquidator makes a written declaration that they have just grounds to conclude there is no possibility that shareholders will get any additional distribution.

Or two, where, during the winding up the liquidator makes no such declaration. The deregistration of a company toward the end of the liquidation can also enable the realisation of any capital loss.

Tax advice

ASIC recommends that all shareholders seek advice surrounding the taxation effects of the capital loss from shares in a liquidated company.

The Australia Taxation Office (ATO) states that if a firm is placed into liquidation, there are legal restrictions on the transferring of those shares, which then, in turn, means these shares could be worthless unless a trust were placed over them.

Shareholders and voluntary administration

When it comes to voluntary administration, shareholders are left out of decision-making processes, losing the right to vote on the future of the company. Shareholders also lose the right to know anything about with the progress of the company

According to ASIC, shareholders are bound by a deed of company arrangement, which must be approved by the creditors. Although, when it does come to financial reporting, the administrator must make the reports available at their office for inspection by shareholders and creditors.

It is clear that there are many twists and turns when it comes to knowing and understanding the role and rights of shareholders in a corporate liquidation. For information on bankruptcy, liquidation and insolvency, get in touch with Corporate Lifeline today.