In a Members' Voluntary Winding up, a Shareholder is a Creditor

Sam Merrylees

Senior AssociateAitken PartnersView Profile

Shareholders and creditors generally have distinct roles and rights when a company is wound up. However, in some relatively unusual circumstances, those roles can overlap. In a members' voluntary winding up, where a solvent company has surplus assets available for distribution, a shareholder's entitlement to those assets can mean they are also considered a creditor of the company.

Case Example: In Re BM2008 Pty Ltd (in liq) [2010] VSC 337 (11 August 2010), Davies J of the Supreme Court of Victoria was asked to adjudicate as to whether a shareholder in a members' voluntary winding up of a company (i.e., where the company is solvent) who has no claim against the company apart from the right to a share in the distribution of the company's surplus assets is a 'creditor' of the company.

The case concerned a transfer of shares in the company made after the company was put into liquidation, which could only be effected if the liquidators consented to the transfer or the Court made an order consenting to the transfer. The liquidators consented on condition that the transferee first pay a judgment debt it owed to the company.

The transferee applied to the Court for orders that the condition imposed by the liquidators be set aside. The liquidators opposed the application, on the basis that the non-payment of the judgment debt was not 'in the interest of the company's creditors', as it left less money to be distributed among the shareholders in accordance with their shareholdings, even though, in either case, the company's creditors apart from its shareholders would be paid in full.

Davies J held that, where a solvent company is wound up, the shareholders have a right to a distribution of the company's assets in accordance with their shareholding, and, as a result of their having that right, the company owed them money. The ordinary meaning (i.e., the dictionary definition) of 'creditor' is 'someone to whom money is due', and money was due to the shareholders as a result of the company's having a surplus of assets over liabilities in its winding up. Accordingly, in this situation, the shareholders were, by virtue of an entitlement to a surplus arising from their shareholding, creditors of the company.

If you are dealing with a company winding up, insolvency issue or a dispute involving creditors or shareholders, our Litigation & Dispute Resolution team can provide advice on your position, rights and available options. Get in touch with our team to discuss your circumstances.