Recovery of Shares from a Company in Liquidation

Minakshi Bindhani

14 Apr, 2023

When a company becomes insolvent and cannot pay off its debts to creditors, it may be liquidated. In such cases, the company’s assets are sold off to repay its creditors, and any remaining funds are distributed to the shareholders. However, recovering shares from a company in liquidation can be complex and challenging. In this analysis, we will explore the steps involved in recovering shares from a company in liquidation, including assessing the value of the company’s assets, determining the priority of creditors, and evaluating the potential outcomes for shareholders^[1]. We will also discuss the challenges that may arise, including outstanding legal issues and shareholder disputes. By understanding the process and potential outcomes of recovering shares, shareholders can make informed investment decisions and navigate the process more effectively.

Purpose of Recovering Shares

• The purpose of recovering shares from a company in liquidation is to allow shareholders to receive any remaining funds from the liquidation process. When a company goes into liquidation, it has become insolvent and cannot pay off its debts to creditors. As a result, the company’s assets are sold off to repay its creditors, and any remaining funds are distributed to shareholders.
• Recovering shares ensures shareholders receive their fair share of the remaining funds after creditors have been paid.
• This is important because shareholders have invested their money in the company and have a right to a portion of its assets.
• By recovering their shares, shareholders can recoup some of their investment and mitigate their losses.
• Additionally, understanding the process can help shareholders make informed decisions about their investments and navigate the process more effectively.

Advantages of Recovering Shares

The advantages of recovering shares from a company in liquidation include the following:

• Potential recovery of investment: Shareholders who successfully recover their shares from a company in liquidation can recoup some or all of their investment, potentially mitigating their losses.
• Priority status: In some cases, shareholders may have priority status over certain types of creditors, which could increase their chances of receiving a larger payout from the liquidation process.
• Transparency: The process is often transparent, allowing shareholders to understand the steps involved and the potential outcomes of the process.
• Legal remedies: Shareholders with legal claims against a company may use the liquidation process to pursue legal remedies and seek compensation for any damages or losses incurred.
• Clarity on investment: By understanding the process, shareholders can make more informed decisions about their investments and potential risks.

Overall, the advantages of recovering shares from a company in liquidation depend on several factors, including the value of the company’s assets, the priority of creditors, and any legal issues or disputes that may arise. However, by understanding the process and potential outcomes, shareholders can make informed decisions about their investments and potentially mitigate their losses.

Disadvantages

The disadvantages of recovering shares from a company in liquidation include the following:

• Uncertainty: The outcome for shareholders is uncertain and varies on several factors, including the value of the company’s assets and the priority of creditors. This uncertainty can make it difficult for shareholders to plan for the future or make informed investment decisions.
• Time-consuming process: It can be lengthy and time-consuming. It can be frustrating for shareholders who may have invested significant time and resources in pursuing the recovery of their shares.
• Reduced pay-out: The amount available for distribution to shareholders may be reduced if there are outstanding legal issues or disputes or if the company’s assets are not worth as much as initially anticipated. This can result in shareholders receiving a smaller payout than they had hoped.
• Legal costs: Shareholders may incur legal costs in pursuing the recovery of their shares. This can further reduce the amount of money available to them and increase the overall cost of the process.
• Limited recovery: In some cases, shareholders may only recover their shares if the company’s assets sufficiently cover its debts. This can result in a complete loss of investment for shareholders.

Overall, the disadvantages of recovering shares from a company in liquidation highlight the potential risks and uncertainties involved in the process. However, by understanding these risks and working with experienced professionals, shareholders can make informed decisions about their investments and potentially mitigate their losses.

Steps Involved in Recovering Shares from a Company in Liquidation

It can be a complex process, and the outcome can vary depending on various factors. This analysis includes the steps involved, the challenges that may arise, and the potential outcomes for shareholders.

Step 1: Determine the type of shares you own.

The first step is to determine the type of shares you own. There are mainly two types of shares: ordinary shares and preference shares.

Ordinary shares are the most common type of shares and represent ownership in a company. Whereas the Holders of ordinary shares have the right to vote at the company’s annual general meeting and to receive dividends, they are the last in line to receive payment in the event of liquidation.

Preference shares, conversely, give shareholders priority over ordinary shareholders in the event of a liquidation. Preference shareholders receive their dividend payments before ordinary shareholders and are first in line to receive payment in the event of a liquidation.

Step 2: Assess the value of the company’s assets

The next step is to assess the value of the company’s assets. This involves identifying all the company’s assets and determining their value. The value of the assets will be used to determine how much money is available to repay creditors and shareholders.

The value of the assets may be affected by various factors, including the condition of the assets, the market demand for the assets, and any outstanding liens or mortgages on the assets.

Step 3: Determine the priority of creditors

The next step is to determine the priority of creditors. In a liquidation, creditors are paid in a specific order of priority. Secured creditors hold mortgages on the company’s assets and are paid first. Then, preferential creditors are paid, such as employees who are owed wages or taxes owed to the government. Finally, unsecured creditors, such as suppliers and contractors, are paid.

Once all the creditors have been paid, any remaining funds are distributed to the shareholders. However, it’s important to note that shareholders are only paid after all of the creditors have been paid, and they may only receive something if funds are left after the creditors have been paid.

Step 4: Consider any outstanding legal issues

Another essential consideration in recovering shares from a company in liquidation is any outstanding legal issues. This may include lawsuits or claims against the company or disputes between shareholders.

If there are outstanding legal issues, they may need to be resolved before any funds can be distributed to shareholders. This can delay the distribution of funds and may reduce the amount of money available to shareholders if legal fees need to be paid.

Step 5: Evaluate the potential outcome for shareholders

The final step is to evaluate the potential outcome for shareholders. This can be difficult to predict, as the outcome will depend on various factors, including the value of the company’s assets, the priority of creditors, and any outstanding legal issues.

In some cases, shareholders may receive a portion of their investment back, but in other cases, they may not receive anything at all. Shareholders may also receive shares in any new company formed due to the liquidation, although the value of these shares may be uncertain.

Always take professional advice.

• If you find yourself facing company liquidation, then, of course, you should get professional advice from an Accountant, Auditor or Liquidator.
• They will tell you what you need to do next

Conclusion

In conclusion, recovering shares from a company in liquidation can be complicated and challenging for shareholders. The steps involved include assessing the value of the company’s assets, determining the priority of creditors, and evaluating the potential outcomes for shareholders. Shareholders need to understand the type of shares they own and their priority in the event of a liquidation. Additionally, shareholders should be aware of any outstanding legal issues and disputes that may arise, as these can delay the distribution of funds and reduce the amount available to shareholders. While the outcome for shareholders is uncertain and depends on several factors, including the value of the company’s assets and the priority of creditors, understanding the process can help shareholders navigate it more effectively and make informed decisions about their investments.

Also Read:
Voluntary Liquidation of a Company under IBC
Essential Directions on Recovery of Shares in India