Vol 9 (2012) - Issue 3

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Shareholders and Insolvency: Soden v British and Commonwealth Holdings plc

The treatment of shareholders in insolvency has traditionally been unsympathetic. The claims of shareholders in their capacity as members are subordinated to those of creditors. Practically speaking shareholders will not receive any compensation or returns of investment from the insolvency proceedings in respect of his or her shareholding, as by definition a company must be unable to satisfy all of its debts to be insolvent. The concept of shareholders ranking as creditors in insolvency claims is not influential in the United Kingdom. A situation arose in which the House of Lords had to deal with the tension arising from a securities claim in insolvency proceedings. In Soden v British and Commonwealth Holdings plc ('Soden') the critical question for the House of Lords was whether damages ordered for negligent misrepresentation would constitute 'a sum due to a member in its character of a member' under section 74(2)(f) of the Insolvency Act 1986. Shareholders are not debarred from obtaining damages or other compensation from a company merely by virtue of being a shareholder. The House of Lords held that a distinction must be made between sums due to a member in his or her character as a member and sums due otherwise than in his or her character as a member, and that sums falling due under and by virtue of the statutory contract between the members and the company constitute sums falling due in the character of a member. The rights of members must not be in competition with the rights of the general body of creditors. It was, however, held that the misrepresentation claims of transferee shareholders are not subordinated and rank pari passu with unsecured creditors. Thus the subordination provisions apply only to subscribing members and not transferees.

Concerns with the decision in Soden
An interesting aspect of the decision was that it was based on the principle that the rights of members as members come last, rather than members come last as is the case under the 'absolute priority rule'. If it is correct that it is only the rights of shareholders based on the statutory contract with the company that are subordinated to the rights of creditors, then three key issues must be discussed: the first being whether there is a logical distinction between the claims of subscribers and the claims of transferees for the purposes of section 74 Insolvency Act 1986; the second is what the effect of section 111A Companies Act 1989 has been and whether Soden is good law; and lastly whether as a matter of policy shareholders should be able to recover on a pari passu basis with unsecured creditors in respect of claims relating to sums paid for their shares.

Is there a logical distinction between the claims of subscribers and the claims of transferees?
The significance of the distinction drawn in Soden between subscribing and transferee members is that the decision is not based on a distinction between the ordinary business risk of equity investments and fraud, but on the statutory contract of shareholding. Subscribing members can also have claims for fraud and misrepresentation.