What if There’s a Shareholders’ Dispute in a Creditors’ Voluntary Liquidation (CVL)?
If the directors of a limited company feel a CVL may be the appropriate course of action, a meeting of shareholders, known as a ‘General meeting’ must be called. Shareholders are entitled to receive 14 days’ notice before attending such a meeting. That meeting has two clear goals: to vote on winding up the company (sometimes called voluntary winding up, or CVL), and to appoint a named insolvency practitioner (liquidator).
What Happens when the Shareholders have a Conflict of Opinion with the Directors?
When a company fails the insolvency test and realises it must cease trading, a dispute is, unsurprisingly, relatively commonplace between the directors and the shareholders. In many cases, the directors are themselves shareholders, but this is not always true. It may be that the company director has no shares at all in which case it’s easy to see why a difference of opinion may arise.
When a significant dispute arises, seek mediation immediately. Protracted disagreement will cost the company money, via disruption of business and possible legal proceedings. If you refuse to consider mediation, the costs of any litigation may be awarded against you, and for that reason, refusal is fraught with risk.
What Percentage of the vote is Required for the Shareholders to put a Company into Liquidation?
Shareholders must adopt a special resolution (requiring a 75% majority of those voting) for a voluntary winding-up to take place.
Dispute Between Several Shareholders
The reasons for a dispute between shareholders are varied: one shareholder may wish to buy the company outright off another, or multiple shareholders may wish to take ownership of the company. In this situation, sealed bid deals, in which shareholders put forward their best offer to an independent party, may be the best course of action.
Settlement Agreement with an Underperforming Director
If a shareholding director is deemed to be underperforming, other shareholders may wish to force that director into resignation and to give up his shares. In the absence of a shareholder agreement regulating shareholders and directors’ conduct, one solution would be to draw up a settlement agreement, offering the director in question some financial package in return for their acquiescence.
If a director is in breach of fiduciary duty (meaning they have failed to act in the best interests of the shareholders), one or more shareholders may feel that their positions are now being seriously prejudiced. In this scenario, shareholders have the right to file an ‘Unfair Prejudice Claim’ to force the responsible action that should have been taken in the first place. A good example of this would be if it were provable that a director had been dishonest, or not spending the necessary time to run the business properly.
The right of shareholders’ redress allows shareholders to seek a court order to remove the direction in question. It should be pointed out that, on occasion, courts will decide that a better course of action would be to force the director at fault to sell their shares, rather than enforcing their removal from office. Shareholders considering this action should be aware that they would likely have to bear their legal costs which can mount quickly since this is a High Court matter.
Once the CVL is Underway, what if one or more Shareholders feels Dissatisfied with the Decisions of the Insolvency Practitioner?
Once the CVL has been agreed upon, shareholders retain the right to apply to the Court should he feel that the liquidator in question is not serving the interests of the company. Any shareholders making such an application must hold at least 10% of the total voting rights of all the shareholders having the right to vote at general meetings. If the Court rules in the shareholder’s favour, it may decide that the amount of remuneration should be reduced, or potentially that some expenses be disallowed.
Author: Mike Smith