The importance of shareholder agreements during insolvency

Shareholder agreements and company insolvency - what you need to know

Shareholder agreements offer clarity for companies in times of adversity, and can provide a safeguard against trading unlawfully if insolvency strikes. Allegations of trading whilst insolvent are serious if you’re a director, and you may be unaware of your obligations under these circumstances.

The Insolvency Act, 1986, states that if directors believe their company is insolvent or likely to become so, they must cease trading to put the interests of creditors first. So how can a shareholder agreement be influential in this situation, and what are the ramifications if you don’t have one in place?

An agreement tailored to your business

One of the benefits of a shareholders’ agreement is that it can be tailored specifically to your company, including how the business might develop in the future, and the way in which disputes will be resolved.

Instructions contained in the agreement take precedence over the company’s Articles of Association, and can prevent a stalemate occurring during board meetings. It will detail how particular situations should be resolved, including conflicts between directors or directors and shareholders, and allows a resolution to be implemented without undue pressure on individuals.

Shareholder agreements can be particularly useful in family-run firms, where conflicts often take on a unique standing as professional and personal issues collide. They also benefit minority shareholders who may otherwise have little influence on the outcome of important matters.

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What will be included in the agreement?

A well thought-out, bespoke agreement might cover:

The agreement is between the company and its shareholders. It essentially lays down how conflicts will be resolved, preventing a potentially time-consuming and damaging in-house dispute.

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Are there any specific risks if you don’t have a shareholders’ agreement?

The potential for dispute between shareholders, or shareholders and directors, is high when you consider the average life-time of a business. Insolvency is a particularly concerning example of where dispute could cause personal issues for directors, as well as further damage the company’s chance of recovery.

Here are just a few scenarios that are commonly experienced:

If you already have a shareholder agreement, it should be reviewed at least once a year to take into account new business circumstances, or a change in the market. Real Business Rescue can advise on shareholder agreements and what should be included for individual businesses. Call our expert team for a free initial consultation, we have an extensive network of 100+ offices offering confidential director support across the UK.