Shareholder’s guide to dealing with a company in financial difficulties

The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:

  • Shareholder’s guide to dealing with a company in financial difficulties
  • Relevant factors
  • Reasons for distress and the need to act quickly
  • Order of priority of payment
  • Equity cures
  • Equitable subordination of shareholder loans
  • Directorship and shadow directorship
  • Debt for equity swaps
  • Top tips for shareholders
  • Practical examples

Shareholder’s guide to dealing with a company in financial difficulties

STOP PRESS: The Corporate Insolvency and Governance Act (CIGA 2020) is in force from 26 June 2020. The government has legislated to temporarily prevent winding up proceedings being taken on the basis of unsatisfied statutory demands and to temporarily stop winding-up proceedings where coronavirus has had a financial effect on the company which has caused the grounds for the proceedings (see Practice Note: Corporate Insolvency and Governance Act 2020—temporary changes to corporate statutory demands and winding-up petitions).

This note aims to:

  1. provide practical guidance to shareholders of a distressed/insolvent company

  2. explain the position of shareholders in most types of corporate insolvency/restructuring situations

  3. provide advice on what a shareholder can do to maximise their position if a company becomes distressed

This note provides guidance to put shareholders in the best position possible when the company enters the 'zone of insolvency'. Whilst a company is operating normally, the interests of its creditors and shareholders are generally aligned. However, once it enters the 'zone of insolvency', the duties of the directors of the company switch to being owed to the creditors (see Practice Note: Directors’ duties: companies in financial difficulties and News Analysis: Directors' duties—a practical guide for insolvency practitioners). As to when the duties switch, Hellard v Carvalho in the matter of HLC Environmental Projects (in liquidation) found

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