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Share Premium entered as Directors Loan

Share Premium incorrectly entered as Directors Loan.

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I have recently taken on a new client who has been with there previous accountant for 5 years. The Company has 3 Director shareholders. Directors A&B did all the work in the Company and C purchased his shares for £50k. They had a shareholder agreement agreeing this, which is all signed and dated. When the previous accountant completed the accounts they entered the £50k as a directors loan. This carried forward for the last 5 years.

Director C now wants to sell his shares and resign as the director of the company. He is asking for his £50k back as the accounts state it was a directors loan not a share premium. Director A is happy to pay the £50k back and director B is saying no as it was a share premium.

Any thoughts on the best way to correct this situation without it getting legal.

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By thestudyman
27th Sep 2019 13:04

Simply you try and stay out of this until the directors resolve the situation.

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By jcace
27th Sep 2019 13:13

Look at the shareholder agreement.
Look at documentation at Companies House if shares purchased from company.

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By paul.benny
27th Sep 2019 13:20

Good advice from thestudyman. If you do get drawn in, a few questions that might help provide a way forwards:

Did C subscribe for shares or where they bought from someone else? If the latter, it's not share premium. Not clear cut if C subscribed for the shares?

Does the shareholder agreement give any clues to the nature of the payment - perhaps by contemplating there being a loan? Was there a loan agreement?

B has presumably approved the last 5 years' accounts. Why does B now claim the accounts are wrong?

Does the company have the resources to repay £50k?

Have A or B lent money to the company?

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By Wanderer
27th Sep 2019 13:26

Any From 42 / Employment Related Securities returns which might give a steer?

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By WhichTyler
27th Sep 2019 14:55

johnhenry wrote:

They had a shareholder agreement agreeing this, which is all signed and dated.


Have you actually seen the shareholders agreement

johnhenry wrote:

Director C now wants to sell his shares and resign as the director of the company. He is asking for his £50k back as the accounts state it was a directors loan not a share premium.


He can't sell his shares if he never bought them....
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By johnhenry
27th Sep 2019 15:44

Answers to some of the questions. I would like to keep as far away from this as possible but have been asked for help.

I have seen the Shareholder agreement and it states the below in relation to the purchase of the shares.

"50 ordinary shares of £1 each in the Company for £50,000"

The share purchase of C was an allotment of shares.

There are the funds to pay this money to C.

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Replying to johnhenry:
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By paul.benny
27th Sep 2019 16:16

So we have an agreement that says one thing and five years' worth of accounts that say another. On the face of it, the accounts are wrong but you would hope the prior accountant had some reason for treating the investment as loan.

Perhaps the question of whether the £50k is share premium or loan should be directed (I suggest by A) towards the prior accountant.

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Replying to paul.benny:
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By johnhenry
27th Sep 2019 16:27

The old accountant has retired and has not been answering any calls or letters.

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Replying to johnhenry:
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By WhichTyler
28th Sep 2019 10:26

So A and B could argue that if the amount is a loan, then C has not met his obligation to provide £50k of share capital, so the loan should be converted to equity

Though as other have said, this is the beginning of a negotiation

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By fawltybasil2575
27th Sep 2019 17:41

@ johnhenry (OP).

Whilst the information re the shares acquired by C is very useful, there are many other aspects of the Shareholders’ Agreement which are important, including:

• general shareholders' rights and duties; and specifically

• Shareholders’ rights to buy shares being disposed of by other shareholders’.

There may be OTHER factors, however, of which you are unaware, in relation to facts which have taken place since C became a shareholder, which would impact upon the amount to which C would be entitled.

Frankly, I would advise each shareholder, if and when you are asked for your advices, to say that this is more of a legal question than an accountancy one, and that they should take INITIAL independent legal advice if they considered it necessary [whilst emphasising that the amount at issue, being relatively small, would not normally render it appropriate to incur substantial legal costs, which can escalate alarmingly (especially where shareholders “dig in” to entrenched positions)].

It is not entirely clear what was the date of C’s becoming a shareholder (I surmise at or around 5 or 6 years ago).

A possible very material factor is the financial position (in terms of Net Assets and future potential) at both C’s becoming a shareholder and the present date.

I would hazard a guess that the financial position has not materially changed between C’s introduction and the present date, in which case logic would suggest that the amount which C should receive is at or around the £50,000 figure which he has requested: that figure however will not necessarily represent the figure to which C is legally entitled.

If A, B and C do ultimately agree a figure for C’s exodus, then Solicitors should be engaged to prepare an Agreement which binds all three parties, to avoid comeback. Such Agreement should state that the Accounts previously prepared were incorrect, and that the next Accounts would rectify that error by the introduction of a Share Premium Account 0f £49,950 (and a corresponding adjustment to C's Loan Account).

Overall, and a stated above, I would be very disinclined to provide formal “advice” to the parties (especially if, with due respect, you do not have experience of being placed in this position – you could potentially have a “conflict of interest” situation if you act for the company and one or more individuals at the same time).

Without knowing the reasons for the different views of A and B, it is difficult to comment further.

Basil.

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By johngroganjga
27th Sep 2019 18:52

What does the return of allotments at Companies House say about the issue price of the shares in question? That must be the key fact.

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RLI
By lionofludesch
28th Sep 2019 16:08

Pfft - point them in the direction of their respective lawyers.

This is not your field of expertise.

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