In the world of business, things can shift quickly. One day, your company is running smoothly, and the next, it’s facing mounting debts and financial uncertainty. When a company heads into administration or becomes insolvent, most people turn their attention to creditors, directors, and business assets. But what about the shareholders? What happens to the carefully structured agreements they once relied on?
Shareholder agreements are legal frameworks that define the roles, responsibilities, and rights of each shareholder in a business. They’re crucial in maintaining balance, settling disputes, and guiding business decisions. But during insolvency or administration, their effectiveness can be challenged.
Understanding how these agreements hold up when a business is in trouble isn’t just helpful—it’s essential. This is where Shareholder Agreement Lawyers in Perth play a vital role. At Corporate Lawyers Perth, we help shareholders navigate these turbulent times with clarity, precision, and protection. In this article, we’ll explore the realities of shareholder agreements during insolvency, what rights remain, and how to prepare for the unexpected.
What is a Shareholder Agreement?
A shareholder agreement is a private contract between a company’s shareholders that outlines the management of the business, ownership rights, responsibilities, and procedures for resolving disputes or transferring shares. Unlike company constitutions, which are public and often more generic, shareholder agreements are custom-built to suit the specific needs of a business and its investors.
Key Components of a Shareholder Agreement:
- Rights to dividends
- Voting rights
- Share transfer restrictions
- Dispute resolution processes
- Procedures during exits or buyouts
- Handling of insolvency or dissolution scenarios
These terms become especially important when the business hits financial rough waters. That’s why it’s essential to get your agreement reviewed and drafted by an experienced solicitor for a shareholder agreement in WA, ensuring it covers scenarios that many overlook.
What Happens During Insolvency or Administration?
Insolvency occurs when a company is unable to pay its debts. Administration is a formal process where an external party (an administrator) is appointed to manage the company’s affairs to rescue the business or repay creditors.
During this period:
- Creditors’ rights take priority over shareholders.
- Control of the company shifts to the administrator, not the directors or shareholders.
- Normal operations are suspended or altered, affecting the rights laid out in shareholder agreements.
Even if your agreement provides rights like share buybacks or dividends, those rights may be temporarily paused or permanently set aside depending on the administrator’s decisions and obligations to creditors.
Real-World Example:
Let’s say your shareholder agreement includes a right of first refusal, allowing you to buy shares if another shareholder leaves. If that shareholder exits during insolvency, the administrator might override this clause to sell shares to a third party to maximize creditor returns. Even though you have legal rights on paper, they may not stand during administration.
Can Shareholder Agreements Still Be Enforced?
Yes and no. The answer depends on the clauses in the agreement and how they interact with corporate and insolvency laws in Australia.
Here are a few examples:
1. Voting Rights
Shareholder voting powers may become irrelevant during administration, as the appointed administrator makes critical decisions for the company.
2. Dividend Clauses
All profit distributions are typically halted, as the company no longer has control over cash flow—creditors get paid first.
3. Buy-Sell Agreements
These may be overridden if the administrator believes honoring them would disadvantage creditors.
4. Exit Clauses
Shareholders might be blocked from cashing out, even if the agreement allows it.
This is why it’s crucial to seek advice from the Best Perth Lawyers for Shareholders’ Agreements, who understand how to draft and interpret clauses that stay effective even when insolvency hits.
The Role of the Administrator
Once an administrator is appointed, they assume full control of the company’s finances and decision-making. Their primary duty is to creditors—not shareholders. This means they can override certain shareholder rights if doing so will result in a better return for creditors.
Administrator’s Powers:
- Sell company assets
- Restructure or shut down operations
- Reject or renegotiate contracts
- Override internal company agreements
In short, administrators have the authority to put shareholder agreements on hold or override them altogether. That’s why it’s important to have clauses in your shareholder agreement that clearly outline procedures for insolvency or administration, which can only be created with help from a qualified corporate lawyer in Australia.
Why Legal Advice Is Crucial
If you’re involved in a company either as a founder or an investor, don’t make the mistake of relying on generic templates or outdated agreements. Only an experienced legal professional can help you:
- Review and future-proof your agreement
- Navigate the implications of insolvency
- Communicate effectively with administrators
- Minimise shareholder disputes during financial distress
Corporate Lawyers Perth works with companies across WA to create bulletproof shareholder agreements designed for real-world challenges—including insolvency.
Conclusion
Shareholder agreements are powerful tools—but only when drafted with care and legal insight. In times of insolvency or administration, your agreement could either protect your rights or be rendered ineffective. That’s why working with a trusted solicitor for shareholder agreement WA professionals, like Corporate Lawyers Perth, is essential.