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An Interesting Case (and a warning) for Retiring Shareholders in SME’s

A very interesting case came in for my attention this morning. A  retired former shareholder/director of a private limited company was very concerned.

Back in 2006 he had managed to dispose of his 50% shareholding in the company under what is known as a “share buyback. The price was quite substantial and would provide him with a retirement nest egg. It had all been attended to very properly under the statutory procedure. The company was in a satisfactory state in terms of net profit and liquidity at the time. So far so good . Client had already received half his money; but now the Company had stopped paying him. Alarm bells!!

It turned out that he had agreed an amount for the shares but had also agreed that the company should be permitted to pay the agreed amount by instalments over 5 years. Could Ralli sue the company for him for damages? I had to explain to him that we couldn’t. Under the 2006 Act this is now expressly forbidden but even before 2006 there is case law saying you cannot sue if this happens.

The agreement by the company to buy shares on a buyback is not a normal debtor/creditor contract. This is because a company can only pay a shareholder in this way as if the payment is a dividend or distribution. And this has to be the case because the statutory procedure is in place to protect the company’s ordinary creditors a distribution can never be made to the detriment of creditors.

So an agreement to pay on a specified date in the future is unenforceable because it is potentially an agreement to do something unlawful.

In my next blog I’m going to say what he should have done.