Shareholders' agreement doesn't match incorporation documents - which takes precedence?

Shareholders' agreement doesn't match...

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Hello.  I have a new client (which sadly will be closing down soon), and am finding various problems in prior year accounts completed by friends of the client for free...

Most notably there is a shareholders' agreement stating they each subscribed £7,000 for one share each in the company. Yet the accounts show a share capital of £2, no share premium and short term loans of £14,000. Having checked the documents filed with Companies House, they support the accounts, i.e. the share capital is listed as 2 £1 shares with £0 paid up. The shareholders consider their investment to have been capital and not a loan (but clearly didn't check or didn't understand the accounts). My question is, does the shareholders' agreement (and the directors' intent) take precedence, making filings to CH incorrect, or do we have to assume CH filing is correct and so that part of the shareholders' agreement is void?  Thanks!

Replies (9)

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By carnmores
29th Jan 2014 15:43

Is it signed, yes i would think

it thats what was agreed then thats what was agreed so

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By MBK
30th Jan 2014 13:07

Agree

It's a question of fact. It seems like the accounts are wrong.

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By whatdoyoumeanwashe
30th Jan 2014 13:15

Yes, but..
The accounts would be (relatively) easy to fix, it's the fact that, per companies house, shares with a £7k premium were never issued, no such resolution has been passed... It seemed simpler to me, if the shareholders will agree, to amend the shareholders agreement?

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By johngroganjga
30th Jan 2014 13:16

What difference does it make?  Surely the shareholders would prefer to be creditors? 

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By RFL H
30th Jan 2014 13:57

Negligible value claim

Is it a trading company?

If so you may want the shares to have been issued at the higher amount.

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By johngroganjga
30th Jan 2014 14:22

Is the shareholders' agreement dated before or after the issue of shares. 

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By whatdoyoumeanwashe
30th Jan 2014 14:57

The difference is that one shareholder has subsequently put in another loan and won't get it all back. If the original investments were loans too then that will dilute their return.

Rfl, yes it's a trading company but soon to cease. I didn't think shares could be issued retrospectively?

John, sorry I forgot to state that. The shareholders agreement is dated approx two years after the incorporation, which was the only time shares have been issued.

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By johngroganjga
30th Jan 2014 15:14

Well the shareholders' agreement falsely asserts that something was the case when it was executed that clearly wasn't.  Matter for legal interpretation perhaps but I would have thought that the shareholders' agreement would have be construed as being void to the extent that it provides for arrangements regarding shares that were purely imaginary.

Something clearly went calamitously wrong with the due diligence of the shareholder who lent more money later in reliance on ranking ahead of the £14,000 already in the company.  If he took professional advice on that perhaps his advisers should be dusting off their insurance policies.

There is of course nothing to stop the company issuing 13,998 new shares now.  Presumably this is not happening because it is not in the interests of one of the shareholders to give up his rights as a creditor.  So you have a shareholder dispute?  

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By whatdoyoumeanwashe
30th Jan 2014 15:49

Thanks that's pretty much the conclusion I'm coming to. The funds left in the company mean that the difference had things been executed correctly is probably going to be under £1k which may disputed. So I'm trying to encourage pragmatism (obviously without breaking any more rules) rather than have them burn more money arguing over it....

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