Articles of Association | provision for shareholder's bankruptcy

[business_hero]

Hi all,

I would like to set a provision in the articles of association that in the event of a shareholder's bankruptcy, the other shareholder's should have the right to acquire the shares of the shareholder in bankruptcy for a £1).
The complicated part is that the shares in the company are held by HoldCos. Could the paragraph also provision for personal bankruptcies of the ultimate beneficial owners?

Many thanks!

Draft (excluding the provision for ultimate beneficial owners):

In the event of a shareholder's bankruptcy, the remaining shareholders shall have the right to acquire the bankrupt shareholder's shares for the nominal value of £1 per share on a pro rata basis, as determined by the total number of shares held by each shareholder at the time of the bankruptcy. The acquisition of shares shall be made in accordance with the provisions of the Companies Act 2006 and shall be subject to the approval of the board of directors. The acquired shares shall be automatically registered in the names of the remaining shareholders, and the shareholder in bankruptcy shall no longer have any rights or interests in the company.

 

[eteb3]

Afraid I can't answer, but two observations:

Are you using model articles? These state that the company is not bound by less than absolute interests, which would imply that the ultimate beneficial owners are veiled completely by the HoldCos.

I would want to re-draft to say "bankruptcy or insolvency", because bankruptcy doesn't exist for bodies corporate under IA 1986. (Maybe bankruptcy includes insolvency by implication, but it would seem sensible to specify.)

Can you say why you'd want to do this? There may be other solutions.

 

[japancool]

Would a trustee in bankruptcy be bound by these provisions?

 

[eteb3]

That was my question, too: looks to me like it could qualify as a transaction at undervalue

Insolvency Act 1986

An Act to consolidate the enactments relating to company insolvency and winding up (including the winding up of companies that are not insolvent, and of unregistered...

www.legislation.gov.uk

TIB could make an application for a court order to treat the arrangements as if they didn't exist.

 

[business_hero]

To be honest, I am actually also a bit concerned about this (trustee might not be bound by it).

Essentially, I have a JV with someone else and we both own the shares in the trading business through our HoldCos.
The trading business relies on the work/input of us both.
Therefore, I just want to make sure that there is a mechanism that the trading business is protected if either of the parties goes bankrupt (at a personal level) or passes away.

Perhaps I could provision for a mechanism that dividends out excess cash and assumes that the trading business in itself is only worth its share capital?

 

[eteb3]

I just want to make sure that there is a mechanism that the trading business is protected

Can you say more precisely what you mean by "protected"?

Do you want to keep the economic interest in the biz out of the hands of the creditors, or just want the biz to continue uninterrupted?

 

[business_hero]

the business depends on the "input" of us both. If one person is not able to bring any input, they should not benefit from it going forward. If the economic interest of the business falls in the hands of the creditor, the person in bankruptcy will likely not bring any input to the business.

Therefore, there should also be an equivalent provision if one of us both passes away.

 

[eteb3]

I see. Keeping the economic interest already accrued to your bankrupt partner out of the hands of creditors seems pretty difficult to me: that's the whole point of bankruptcy law.

But something like the provisions of LLP law would ensure that at least you can continue with the biz as it stood up to that point: I assume this must be all fair and square with the Insolvency Act, or it wouldn't have made it into primary legislation:

his trustee in bankruptcy ... may not interfere in the management or administration of any business or affairs of the limited liability partnership

Naturally you need professional advice, but fwiw I would think a solution is along these lines (IANAL, this is not advice):

Split the economic and governance interests in the company* by swapping the existing ordinary shares for [non-voting-capital-and-dividend-distribution-rights-shares] + [voting-shares-no-rights-to-distributions-and-redeemable-by-company].

Issue those pro rata to HoldCo and ultimate owner as joint owners, with a nominal value on the voting shares a fraction of a penny so as to give a total holding of £1 or much less. (I assume your accountant would prefer an integer value of pennies.)

Make provision in the articles that the voting shares will be redeemable at the option of the company in the event of any owner of the shares being wound up, dying, or made bankrupt. A suitable precedent, suitably modified, might be in the Charity Commission model company articles.

This way creditors are not denied the bankrupt's economic interest - and any attempt to do so would presumably come unstuck during the insolvency process - but you can continue the biz exactly as you were. Any new capital can come in as B shares (maybe make provision for that now) so creditors don't benefit from anyone's subsequent contribution.

Critique from more qualified people welcome!

 

[eteb3]

Or become an LLP: if you're both managing the business, it may be a more suitable vehicle than the Ltd you're using, since you sound like a quasi-partnership.

 

[The Resolver]

I would suggest it would be safer for the trigger event to be any 'act of insolvency' not bankruptcy itself and so pre-date the formal TIB becoming empowered and include arrangemenst with crediors, personal administration, and court and tribunal judgment unsatisfied after x days and wrap all that up within a more comprehensive good employee/bad employee provision (assuming you both take nominal salaries and work for the company) so that if it comes within the bad employee definition the forced transfer at nominal sum becomes safer.

The supporting argument is that you both agreed that it was in neither of your interests that if one of you becomes insolvent it would be damaging to the trading of the company (lower credit, higher penalties etc and lost business). It could be drafted in a way that makes business sense and is not a device to defeat creditors. Of course it would need to allow for the factthat the dshares are held by holding companies but that is just in the drafting.

 

[eteb3]

As a general principle, can articles make reference to the ultimate beneficial owners of shareholders, or other third parties? I always assumed they couldn't, because of Companies Act restriction on recognising less than absolute interests. Sounds like they can? Thanks.

 

[The Resolver]

I’m not clear on what you are concerned about precisely. But i am assuming in the OP’s case an individual owns all the shares in the holding company ( which is the shareholder) so, in the case we are being asked to advise on, the shareholders are the Holding Companoes and beneficial owner ship of such shares ( the control of ,and full beneficial ownership in, is with the individual. So beneficial ownership is clear and full.

Yes these Atticles can be drawn up together with a shareholders Agreemrnt to further reduce the risk of dispute.

i can provide the Atticles and quote my fee to the OP IN a PM exchange

 

[eteb3]

Thank you. I got muddled with the model articles and thought it was in the Act: company "not in any way to ... recognise any interest in a share other than the holder’s absolute ownership".

And then again bc HoldCo shareholder is a third party with respect to the company, so not party to the Articles.

But guess this is like any other contract. Guess you can set conditions relating to third parties without any difficulty: "I'll pay you double if the mayor closes the bridge".

 

[Solvelaw]

I think in this case, you might find it difficult to draft around insolvency legislation, however having said that if the Trustee forms the view that the shareholding is onerous, it might be disclaimed so it depends on the value of the shareholding. Don't take my word on it though.