A Shareholder’s guide to when things go wrong

Partner, Commercial Disputes and Employment Lawyer, Peter Lamble, discusses what shareholders should consider if issues start to arise within a company.

When things start to go wrong for a business, its shareholders can often be seriously affected by those issues and how they are resolved.

It is important for shareholders to keep on top of what is happening within the business, so they are not taken by surprise should any problems start to arise.

Hitting a rough financial patch

If all is going well financially with a company, the interests of its creditors and shareholders are generally in harmony. However, hitting a rough financial patch can switch the duties of the company’s directors towards the interests of its creditors.

Company directors have a duty to make efforts to ensure they pay creditors the money they are owed. Insolvency is not a prerequisite for the duty to creditors to arise and Directors are not free to act, without first having considered the creditors interests rather than those of the company and its shareholders, which puts at risk the creditors’ prospects of being paid.

However, if a company is going to be able to pay its creditors in any event, there is no such constraint on the directors. Knowing exactly when the risk to creditors’ interests becomes real has to be judged on a case-by-case basis.

Shareholders rank at the bottom of the order of priority of payment in a formal insolvency, so they rarely see any returns unless they also have claims as a creditor, such as under a shareholder’s loan.

Voicing your views

The extent to which shareholders’ views will be considered will depend on various factors, including whether they can coordinate together, if it’s a private company and if the shareholders have a presence on the board.

Am I a shadow director?

If shareholders don’t have a board position, but exercise close control over the company’s expenditure and activities for a prolonged period, there’s a technical risk that they may be classed as shadow directors.

This can happen if a shareholder becomes so closely involved with the business, that the company’s directors become accustomed to acting on their directions or instructions.

Shareholders should be aware, in these circumstances, of the potential liability for wrongful trading as a shadow director, if the company subsequently enters liquidation.

What can I do?

If problems do start to arise within a business, there are a number of things that shareholders can do. These include:

• instructing legal advisers as early as possible
• requesting and reviewing updated management and trading accounts, forecasts, cashflow statements regularly
• most importantly, keeping in touch with the company’s board of directors and having an open dialogue with them. Shareholders must ascertain if they are genuinely just having temporary financial difficulties, or if the company’s problems are terminal.

For more information on this issue, contact Peter Lamble in the Commercial Disputes and Employment team on peter.lamble@coodes.co.uk or 01872 246220.