All publications
Directors: The Potential Liabilities You Face When Issuing Shares

Directors: The Potential Liabilities You Face When Issuing Shares

February 18, 2019
 / 

The Companies Act imposes a raft of important duties on directors, one of which is to ensure that the company remains a going concern with adequate liquidity and solvency.
Which means that you may on occasion have to find further funding in order to satisfy the going concern test. Or perhaps you need to raise more money for a program of major expansion. Either way, one option could be to issue new shares.
Be careful though of the Act’s requirements when it comes to setting an issue price for the shares – drop the ball on this one and you could face damages claims and personal liability.

In the life cycle of your company, there will be times when you need to recapitalise the business.

When would you need to issue shares?Directors and the Potential Liabilities

A basic requirement of the Companies Act (the Act) is that the company remain a “going concern” (have enough funding to remain in business for the next 12 months). To satisfy this requirement, directors must regularly perform liquidity and solvency tests (liquidity tests if there will be sufficient cash to meet all obligations whilst solvency tests if assets in the business exceed liabilities). If these tests indicate funding will be needed, one avenue open to the company is to issue more shares.

Alternatively, a company may issue new shares when it plans a major expansion.

What is required of directors?

In terms of the Act, directors are responsible for issuing shares and must issue them for an “adequate consideration” which is to be calculated by the directors prior to the issuing of the shares.

This section of the Act requires that directors apply their minds to determining what an “adequate consideration” is. In this process, directors need to keep the best interests of the company in mind, cannot have a conflict of interest and must show the necessary “care, skill and diligence” when performing this task.

This can be a demanding process as for example, the market may dictate that shares be issued below market value or an “inadequate consideration”. In this scenario, the company might, for example, have issued shares in the recent past and shareholders may only be prepared to take up new shares at a discount. Directors need to be able to justify the course of action they take i.e. that the value/consideration is actually adequate in the particular circumstances.

If you as a director fail in this task…

Directors can be held personally liable if they do not issue shares for an “adequate consideration” and may have to compensate stakeholders for any damages suffered in this process.

Thus while the Companies Act grants widespread powers, it also makes directors personally liable for losses sustained as a result of their actions. It is critical that you document your decisions so that you can withstand any scrutiny of them.

Our company secretary services offered by Tuffias Sandberg will ensure you are compliant at all time, our objective is to provide a service that will take all risk off you and your business.

 

Share this article