What Happens to a Company’s Shares During Liquidation?
If your company is publicly listed and begins the liquidation process[1]Trusted Source – GOV.UK – Liquidate a Limited Company, trading in its shares is stopped. These shares are then considered “deemed worthless,” indicating they belong to a company that no longer operates.
During liquidation, the transfer of shares is typically prohibited without the consent of the liquidator. This means that shareholders cannot sell or dispose of their shares freely.
For shareholders, you now have the option to declare these shares as a capital loss, potentially reducing your income tax liability. After appropriate documentation, these shares can be removed from your investment portfolio. You can retain the share certificates as memorabilia, but they won’t have any legal or financial standing.
Shareholders Agreements
In the case of private limited companies, the treatment of shares during insolvency is sometimes governed by a shareholders’ agreement. This agreement may include provisions for the valuation and distribution of shares in the event of liquidation, which could differ from the statutory order of priority, which I’ve listed below.
Where Do Shareholders Rank in the Payment Priority?
Although the primary aim of a liquidation is to pay creditors, shareholders rank the lowest in terms of their priority.
During insolvency, the proceeds are paid to creditors in the following legally prescribed order:
Secured creditors [e.g., banks with mortgages on company property, equipment lenders]
Shareholders [e.g., common stockholders, preferred stockholders]
When Will Shareholders Receive Payment During Liquidation?
Shareholders are the last to receive payment during liquidation, following the settlement of all creditors’ claims. This process can vary in duration, often extending from several months to a few years, depending on the complexity of the liquidation and the time required to sell assets and settle disputes.
Legal and Financial Consequences for Shareholders
When a company undergoes insolvent liquidation, shareholders have limited legal rights compared to creditors. They typically have the right to attend and vote at shareholder meetings concerning the liquidation. However, their influence on the process is minimal since creditors’ interests take precedence.
Tax Implications
Shareholders may be able to claim a capital loss on their investment in the liquidated company. This loss can potentially be used to offset other capital gains, reducing the overall tax liability. It is advisable to consult with a tax professional to understand specific implications and reporting requirements.
You should discuss this with your account, but, in principle, you can:
Report the loss to HMRC using the Capital Gains Tax pages of your Self Assessment tax return. This loss can be offset against other capital gains in the same tax year or carried forward to offset against future gains.
If the shares are deemed worthless before the company is officially liquidated, you can make a negligible value claim[2]Trusted Source – GOV.UK – Negligible value claims and agreements. This allows you to crystallise a loss even if the company hasn’t been formally liquidated yet. Submit a claim to HMRC specifying the negligible value date.
If your shares were acquired through an Enterprise Investment Scheme (EIS), you may be able to claim loss relief against income, not just capital gains. This can provide significant tax savings. Ensure you consult with a tax adviser to utilise this provision effectively.
FAQS
Are Shareholders Considered Creditors in a Liquidation?
In the UK, shareholders are not considered creditors. They are owners of the company and stand at the end of the line in terms of payment priority. Creditors are paid first, and only if there are any remaining funds will shareholders receive anything.
Will Preferred Shareholders Get Paid Before Ordinary Shareholders?
Yes, in the event of a liquidation, preferred shareholders have priority over ordinary shareholders. They are more likely to receive a distribution if funds are available after paying creditors. However, their payment is still not guaranteed and depends on the remaining assets.
What Should I Do If I’m a Shareholder in a Company Facing Liquidation?
Stay informed about the liquidation process and its progress. You may be invited to meetings or to vote on certain resolutions. It’s also wise to consult with a financial advisor to understand the implications for your investment and explore any potential tax reliefs or losses.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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