28 Feb 2023

What happens to my shares if I go bankrupt?


4 min

We can do it the easy way or the hard way…

This article discusses what happened when our attempts to realise value for a bankrupt’s shareholding in a private company were resisted.

Upon bankruptcy, a bankrupt (debtor) gains protection from being pursued by creditors chasing their outstanding debts (except for certain debts not covered by bankruptcy). The trade-off is the debtors property vests in a bankruptcy trustee (sections 58 and 116 of the Bankruptcy Act 1966) and is available for division amongst their creditors.

Property includes anything of value belonging to the debtor at the date of bankruptcy (subject to limited exceptions), together with items obtained by or which are given to the debtor before discharge from bankruptcy. Such property includes shares, including shareholdings in private companies.

Section 1072C of the Corporations Act 2001 sets out that the bankruptcy trustee is entitled to the same rights and benefits that a bankrupt would be entitled to if they were not a bankrupt, including: 

(a)   the same dividends; and

(b)   the same rights, for example, but without limitation, rights in relation to:

(i)            meetings of the company; or

(ii)           documents, including notices of such meetings; or

(iii)          voting; or

(iv)          inspection of the company's records

Under the Bankruptcy Act, the bankruptcy trustee also has the right to request books and records of the company (including financial statements) to assess the company’s net asset position to determine the value of the shareholdings. 

In a recent bankruptcy handled by the Worrells Melbourne office, the debtor disclosed a significant shareholding in a privately-owned company that had substantial value (and many times more than needed to annul the bankrupt estate). As the shares now vested in the bankruptcy trustees, we took steps to realise the shares for the benefit of creditors. 

As there is no open market to trade shares in privately-owned companies, our starting point was enquiring with the existing non-bankrupt shareholders to ascertain whether they were interested in acquiring the debtor’s shareholding. We didn’t receive any interest. 

During the intervening period, the company was not complying with our requests for information, to enable us to ascertain its net asset position. We also became aware it was issuing substantial quantities of new shares (contrary to the requirements of the company’s constitution), which materially diluted the debtors’ shareholding in the company. 

Given these developments, the bankruptcy trustees considered the company affairs were being managed in a way that was unfairly prejudicial and/or detrimental to the bankrupt estate’s interests as a shareholder, in contravention of section 232 of the Corporations Act. We filed legal proceedings to seek orders that the company purchase from the bankruptcy trustees the debtor’s shares for fair value (section 233(1)(e)), or alternatively an order that the company be wound up (section 233(1)(a)). 

The court ultimately agreed with us as the bankruptcy trustees and declared the company’s affairs had been conducted: 

  • Contrary to the interests of its members, and

  • Oppressively, unfairly prejudicial, or unfairly discriminatory against the bankrupt estate

This was a significant victory for the bankrupt estate’s creditors. For the time being, the company has managed to stave off an order for its winding up pending payment of sufficient funds to annul the bankrupt estate. 

The outcome in this case was ultimately achieved only through intervention of the court, adding significantly to cost and unnecessary delays. The takeaway is don’t put your head in the sand when dealing with a bankruptcy trustee. Given their duty is to realise assets to repay money owed to creditors it is far better to be proactive and negotiate in good faith to achieve a commercial outcome that all parties can live with.

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