Insolvency and shareholders

A shareholder is someone who has a financial interest in a company because they own some or all of its shares.

When a business is unable to pay all of its debts when they are due, it is considered to be insolvent. It should then be placed under the control of an external administrator, who must be a registered liquidator, and who ideally should be a Professional Member of ARITA .

The company may be placed into:

  • Liquidation, also known as winding up;
  • Voluntary Administration or Deed of Company Arrangement;
  • Receivership or Receiver and Managership.

The appointment of an external administrator may be voluntary, if it is initiated by the company itself, or involuntary when it is made by a person or organisation that is owed money, or by the courts.

When in liquidation, an external administrator’s primary duty is to the company’s creditors. The shareholders rank behind the creditors and are usually unlikely to receive any dividend unless they also have a claim as a creditor.

In a voluntary administration, a voluntary administrator isn’t required to report to shareholders on the progress or outcome of the voluntary administration. Shareholders do not have the right to vote on the future of the company.

If a deed of company arrangement is entered into by the company, any shares owned may continue to have value.  This will depend on the terms of the arrangement.

When in receivership, the receiver’s primary duty is to the company’s secured creditor. A receiver has a duty of care to all creditors and shareholders to sell the secured assets for not less than its market value or, if there is no market value, the best price reasonably obtainable.

If an external administrator makes a written declaration that they have reasonable grounds to believe that there is no likelihood that shareholders will receive any further distribution at any time in the future, shareholders may be able to realise a capital loss. To realise a capital loss, the shares in the company must have been purchased on or after 20 September 1985.  Shareholders should always seek independent tax advice regarding possible tax consequences.

ARITA and ASIC provide a range of information sheets for further information.