Bankruptcy is an incredibly onerous process; upon adjudication, all property belonging to the bankrupt or vested in the bankrupt automatically vests in the Official Assignee (OA) (s 101 Insolvency Act 2006 (the Act)). The definition of property under the Act is wide and includes “property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise” (s 3(1)). As a result, shares in a company are included in this definition.
Context
We have recently been engaged to act for the spouse of a discharged bankrupt. Our client and their spouse both held 50% shareholding in a company that was essentially their retirement fund. Upon bankruptcy, 50% of the shareholding vested in the OA pursuant to s 101 of the Act. As there was no shareholders’ agreement for the company, there were very few restrictions on what could be done with the shares.
What happened
The OA wanted to realize the value of the shares that the bankrupt held in the company for the benefit of the creditors of the bankrupt. The OA offered to sell the shares to the remaining shareholder (our client) for circa $110,000.00 and warned that the OA would take steps to either liquidate the company or sell the shares on the open market, if this offer was not accepted. The basis of the OA’s valuation of the company’s shares was to simply ascertain the value of the net assets of the company. After calculating the value of the net assets, the OA then halved this to represent the 50% shareholding it held and then adjusted this figure for the shareholders’ current accounts.
The previous advisors of our client recommended accepting the value prescribed to the shares by the OA.
Upon being engaged by the client, we ascertained that:
- The company had only been able to retain a level of value in the assets it owned due to the efforts, including unpaid work, of our client and the spouse.
- They had not received any remuneration for work carried out for the company since its incorporation, over 20 years ago.
- Taking a simple net asset position divorced from all other factors is not a reliable method of assessing the value of shares in a company in these circumstances.
As our client’s spouse had been adjudicated bankrupt and no longer eligible to be a director, this left our client as the sole director of the Company, and subsequently, our client had the power to set the director’s remuneration pursuant to s 161 of the Companies Act 1993. In such circumstances, any excess in the company could simply be remunerated to our client, making the shares worthless even with the net asset valuation method. The company was not simply profitable without our client’s unpaid services as a going concern.
We explained these concerns to the OA. After negotiations, our client was able to purchase the shares at a fraction of the amounts that the OA had been offering, which was also in full and final settlement of any claims that the OA may have had against our client and the company.
Key takeaways
This case demonstrates the importance of having a comprehensive shareholders’ agreement in the event a situation as this occurs, and also to obtain a valuation before purchasing items like shares, the value of which is not always obvious.
If we can be of assistance in any way, If our expertise can be assistance, do not hesitate to contact us at info@norlinglaw.co.nz for a conversation or schedule a FREE 30-minute Legal Consultation with Brent.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Luisa is a senior solicitor at Norling Law and sees her role as a guide to those in their decision making process in litigation and to help them achieve the solution they seek. Luisa has a particular interest in commercial litigation and is a member of the Arbitrators and Mediators Institute of New Zealand.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.