Shares

September 2006

1) Introduction

It is likely that the official receiver may encounter more bankrupts holding shares as a result of the  ‘windfall’ shares distributed to building society account holders etc. The current system for realising shares is relatively straightforward but it is imperative that all of the necessary steps are followed closely to ensure that there are no problems.

 

2) Official receiver’s duties

Because the official receiver can take no action to sell shares until he/she becomes trustee or liquidator of a case, he/she must protect his/her interest and prevent the possible re-registration of shares in a name other than that of the insolvent until such time as he is in a position to sell.

Once aware that a bankrupt or company in liquidation holds any shares, a certified copy of the bankruptcy order or winding up order should be lodged immediately against the shares with the appropriate company registrar, using form SHARES (Shares as asset, notification to registrar). 

In this chapter, references to company registrars have no connection with the Registrar of Companies or Companies House. When a listed company issues shares it will employ either a share service company or bank registrars to administer and distribute the shareholding and it is this registrar, rather than the issuing company itself, with whom the official receiver must lodge notice. In cases of uncertainty, the official receiver’s broker should be able to advise which registrar to notify.

Once informed of the order, the company registrars should be able to confirm that the insolvent is the registered owner of the shares and advise the official receiver of any other holding in the name of the insolvent. Obviously, in those cases where the insolvent is not actually the listed shareholder, the share certificate should be returned to the bankrupt or director and no further action taken.

It is important that any share certificates are recovered from the bankrupt or director to prevent them being sold or used as security to incur further indebtedness. But it is recognised that at times there are problems in obtaining the share certificates – either because the bankrupt or company director has lost them or is just not answering enquiry letters. The official receiver should not waste time chasing the certificates and it is anticipated that no more than two letters should be sent to the director(s) or bankrupt to obtain them.   

Where the insolvent was a regular dealer in shares, the broker(s) employed by him to carry out those dealings should also be notified of the bankruptcy or winding up order, particularly where the dealings have been under CREST and there are no share certificates available. This should prevent any unauthorised dealings taking place after the date of the insolvency order.

The next step should be to ascertain the value of the shares in question. Where the shares are held in a public company quoted on the Stock Exchange, a rough guide to their value can be obtained from checking the share listings in one of the broadsheet newspapers or the internet. Otherwise, a telephone call to the brokers or any bank should provide an up-to-date valuation. Where the shares are of value, the share certificates should be placed in the safe until they can be sold and, where necessary, photocopies taken for the file.

 

3) Can the official receiver sell any shares?

The most common types of shares that the official receiver will come up against are ordinary shares in a public limited company, which can be traded on the Stock Exchange and, as a result are readily saleable.

The other shares most likely to be encountered are preference, participating preference, cumulative preference and convertible stocks, all of which can be traded in the same way as ordinary shares if the company issuing the shares is quoted on a stock exchange fullstop

 

4) What if the shares are not quoted on a stock exchange?

When shares that are not quoted on a stock exchange but have been issued by a private limited company, they cannot generally be sold to the public nor traded in the usual way. In such a case, the official receiver may have difficulty in selling the shares as the articles of the issuing company are likely to include restrictions on their sale and there is also unlikely to be a ready market for sale. (The Articles of a company are the rules which govern the way a company is run and outline the rights of the members or shareholders and any restrictions on those rights.)

Valuing shares in both private companies and public companies which are not quoted on a stock exchange, is notoriously difficult. The value of such shares is dependent upon a number of factors, including the company’s financial position, its dividend policy, the size of the parcel of shares in relation to the other issued shares (as, generally speaking, the greater the control which might be effected by the shareholder, the greater the value of the shares), whether the shares are fully or only partly paid, etc. There might also be other factors applicable to the company itself.

If the shares have been issued by a well known private company, they could be advertised for sale by auction - await instructions from the examiner before embarking on such a course of action. The likelihood is that the shares will be held in a small, unknown private company and the bankrupt/ director may be able to suggest a purchaser for the shares, particularly if the business is a family concern, or the shares could be offered to the existing shareholders, once a valuation has been obtained from a broker, bank or accountant. Again the advice of the B1/ examiner should be sought in this situation.

Before any action is taken, the share certificates should be recovered and the company’s registrar asked to confirm that the insolvent is listed as the shareholder. Generally, the restrictions on a shareholder’s rights to transfer shares contained within the articles of a company do not apply to the trustee in bankruptcy or liquidator unless expressly stated to do so. It would be advisable to ensure that the directors of the company which issued the shares accept that the official receiver may transfer the shares, although they are unlikely to refuse as it could be deemed that they are not acting in good faith and a court could order the transfer be registered in any event. Further information and guidance on the sale of shares in private companies can be found in Technical Notice T11/03: Sales of shares in private companies: lessons to be learnt following the making of a fruitless payment and in the Technical Manual paragraphs 31.5.44 -31.5.66.

 

5) What is CREST?

CREST is the system currently operated by the Stock Exchange to allow for the buying and selling of shares which replaces the TALISMAN system in operation up until April 1997.

Under the CREST system, shareholdings are recorded electronically so that paper share certificates need not be issued, although the shareholder can have a paper certificate should they want one and many do. Most shares quoted on the Stock Exchange are included in this system but companies do have the right to opt out, so where there is any uncertainty, check with the broker, who may still be able to sell the shares or recommend another broker to do so.

The CREST system has strict regulations concerning the way it is operated which can result in financial penalties if not complied with. In particular, the rule concerning settlement of the sale transaction is that it must take place within a maximum of 10 working days of the date the deal took place (this is known as T+10). Where the official receiver has all of the necessary documentation, including the share certificate(s), settlement will usually take place within 5 working days ( T+5 ). It is therefore imperative that once the CREST transfer form is received in the office, it is signed and stamped by the official receiver and returned immediately. Where no official receiver is available, an AOR can sign the transfer form in his place, and should be described as ‘Deputy Official Receiver’. If a previous agreement has been made, it is possible to extend the settlement period but this should not be necessary in most cases.

 

6) How does the official receiver sell shares?

(Amended September 2012)

Once the official receiver is trustee or liquidator in a case, he can instruct his/her broker to sell the shares on his/her behalf. When first contacted, the broker will quote the current price of the shares in question, and if this price will be sufficient to cover the broker’s costs and any Secretary of State (SoS) Fee where appropriate, the sale can go ahead. The SoS fee is charged as a percentage on 'chargeable receipts' paid into the Insolvency Services Account. The SoS fee (fee B2 and W2) is charged in accordance with the following table- 

Bankruptcy (B2)

Liquidation (W2)

0% of the first £2,000

0% of the first £2,500

100% of the next £1,700

100% of the next £1,700

75% of the next £1,500

75% of the next £1,500

15% of the next £396,000

15% of the next £396,000

1% of the remainder, subject to a maximum of £80,000

1% of the remainder, subject to a maximum of £80,000

For more information on this please refer to the Technical Manual chapter 36: Estate Accounting - Part 1: Fees and Disbursements in Insolvency Proceedings.

Across the country, different official receivers use different brokers, depending on which firm they find works best for them in their area. If unsure, check with colleagues to discover which is the preferred firm in your office.

However, the use of stockbrokers is not always the cheapest or best way to deal with these assets and at times (especially where the value of the shares is relatively low) it may be more appropriate to sell the shares through the share registrar of the company concerned. For example, shares issued under an employee share scheme or by some banks and utilities do have a low cost share transfer scheme available. These options should be explored before instructing brokers.  

On occasion, the shares may not be fully paid up, which means that the purchase price was to be paid in instalments and some of those instalments are still outstanding. If the value of the shares once sold would not be enough to cover the balance of the purchase price as well as all the usual costs and charges, there is little point in proceeding with the sale. In any borderline case, ask the B1/examiner to confirm that the sale should proceed.

Once the decision has been made to sell the shares, write to the firm of brokers asking them to sell the shares on behalf of the official receiver. A certified copy of the bankruptcy order or winding-up order which should also have the official receiver’s stamp on it must be sent with the letter of instruction, together with any share certificates recovered and a certified copy of form NNM (Notice of No Meeting) or a brief note to the effect that the official receiver is liquidator according to section 136 of the Insolvency Act 1986.

NB A copy order is certified when a member of staff - in this case the official receiver - adds a phrase such as " I hereby certify that this is a true and exact copy " and signs and dates the copy document.

The broker will then sell the shares and prepare a CREST transfer form for completion by the official receiver and return. Because of the strict settlement date requirements, this form should be returned to the broker as soon as possible - not more than 2 days after receipt. On settlement day, the broker will receive payment for the shares through the CREST system and then pay the official receiver

 

7) What if the share certificates are not recovered?

The fact that the share certificates in a case have not been recovered by the official receiver does not mean that they cannot be sold. It may be because the bankrupt or company director has lost them or is just not answering enquiry letters. Official receivers should not waste time chasing the certificates and it is recommended that no more than two letters should be sent to the director(s) or bankrupt to obtain them.   

The next step should be to inform the broker how many shares the insolvent purports to hold and in which companies. The broker can then confirm the holdings with the share registrars and, where the share certificates have been lost, they can then obtain duplicate certificates and arrange indemnity cover, the cost of which can be deducted from the sale proceeds of the shares. The sale can then proceed in the usual way. However, unless the nominal value of the shares held is £10,000 or more, the official receiver should not incur the cost of insurance to indemnify the indemnity.  

 

8) What about overseas shares and shares that are not CREST listed?

Where the shares held by the insolvent relate to a foreign stockmarket, a firm of brokers may still be able to deal with them or, if not, should be able to recommend a broker who does deal with that country’s shares. Check the value of the shares and ask how much the broker’s administration costs are likely to be so as to ensure that the value of the shares once sold will cover the costs and charges incurred in selling them.

If the shares in question are not CREST listed, your broker may still be able to sell them or find an alternative broker to do it. Again, check that the sale value of the shares will justify their sale before issuing instructions to sell.

 

9) What if the shares cannot be sold?

Where shares are not immediately saleable but the broker advises that they are likely to acquire a value in due course, the official receiver should ask the company to note in its records that any beneficial interest in the shares has passed to the official receiver as trustee or liquidator of the insolvent estate. The shares should then be added to the protracted assets realisations register.

Whilst a case remains open, any dividends payable should be sent to the official receiver as trustee or liquidator and these remittances should continue to be paid into the insolvency estate to defer costs. However, it is not appropriate to keep low value shareholdings on the protracted asset realisation register. If, at the point when the official receiver is ready to apply for his/her release, the cost of selling the shares is still more than the realisation to be made, the official receiver may consider disclaiming his/her interest in the shares.

If it is appropriate for the official receiver to disclaim his/her interest in the shares they should be disclaimed in the usual manner. For more information on this subject please refer to the Case Help Manual: Disclaimers. Under Rule 4.188 or Rule 6.179, the company registrar will be issued with a copy of the disclaimer  as an interested part. Who owns the shares once they have been disclaimed will be dependant upon the company’s Articles of Association.  

 

10) Accounting for the shares

The official receiver should inform creditors as to what has happened to the shares. This could be as part of his/her report to creditors, notice of the intention to apply for early discharge (bankruptcy only) or release notice; whichever is the most appropriate.  

 

Notes:

  1. It is usually considerably cheaper to use brokers to arrange indemnity cover where share certificates have been lost rather than the share registrars or independent insurers.
     

Where can I find out more?

Technical Manual:

Chapters 31.5 part 5: Shares and other traded monetary assets

Chapter 34 - Disclaimers

Case Help Manual - Disclaimers

Technical Notices:

T11/03: Sales of shares in private companies: lessons to be learnt following the making of a fruitless payment.

T36/04: Updating The Service's policy and guidance on dealing with the realisation of certain assets

Forms to be used:

SHARES Shares as asset, notification to registrar
NODIS  Notice of disclaimer
DMRCT1  Disclaimer, Report to court 1
DMRCT2  Disclaimer, Report to court 2

 

Click HERE to view the flowchart for Dealing with Shares

 

Procedure

LOIS screen references are given in brackets e.g (DO73)

1. Receive instructions from examiner indicating that the insolvent holds shares. 
2.Contact the company’s registrar to request confirmation that the insolvent is listed as the shareholder. If not, return any share certificates to the real owner and note the file and LOIS accordingly (CA08/CA15). 

3. When it has been confirmed that the insolvent is a shareholder in a company. Send form SHARES (DO73) to the company registrars enclosing a certified copy of the bankruptcy order or winding-up order, asking them to confirm that the official receiver’s interest has been registered. If unsure of their identity, check with the examiner.

4. If the OR is in possession of the share certificates ensure that they are stored securely in a safe location as per your local office procedure. Keep a copy of the document(s) on the file for day to day reference on the file. The documents will be needed at a later date in the proceedings, either upon handover to an IP or in connection with the sale. 

5. If the insolvent regularly used a broker(s) to deal in shares prior to the insolvency order, notify that broker(s) of the bankruptcy or winding-up order order made against their client. 

6. Where the bankrupt or director has undertaken to surrender the share certificates but has failed to do so, write asking for them to be sent to the official receiver by return. There may be problems in obtaining the share certificates – either because the bankrupt or company director has lost them or is just not answering enquiry letters. N.B. Do not waste too much time chasing the certificates - for example, it is anticipated that only two letters should be sent to the director(s) or bankrupt in an effort to obtain them.    

7. If an IP has been appointed as trustee or liquidator, any share certificates and/or documentation relating to the assets held by the OR must be handed over to the IP. For more information on this please refer to the Case Help Manual: Handover to IP. Where the OR is to remain as trustee or liquidator the relevant action must be taken to deal with the shares. 

Dealing with shares that are not quoted on a stock exchange or private companies

8. If the shares are not quoted on a stock exchange, it is difficult to obtain a true valuation.  The value of such shares is dependent upon a number of factors, including: the company’s financial position, its dividend policy, the size of the parcel of shares in relation to the other issued shares (as, generally speaking, the greater the control which might be effected by the shareholder, the greater the value of the shares), whether the shares are fully or only partly paid, etc. There may also be other factors applicable to the company itself.

In cases where the OR has to sell shares in unquoted or private companies care must be taken to ensure that the best or at least a proper price is obtained for them. It is highly unlikely that any two valuers of the shares involved would provide the same valuation. For this reason the first offer for the shares should not be accepted without seeking more information. It is anticipated that the examiner would deal with all queries relating to this due to the complex nature of the work involved. Full guidance is available from Technical Manual paragraphs 31.5.62 and Technical Notice: T11/03.

9. Where the shares are listed on a stock exchange find out the value of the shares from the internet or a newspaper listing,  or by phoning the broker or a bank.  The OR should aim to sell the shares for the benefit of the estate, provided the realisation from the sale is greater than the cost of that sale.  Normally, the costs of a sale would include the broker's fee and a settlement charge (i.e. assuming that the OR is in possession of the share certificates). 

10Before instructing any brokers their charges must be checked.  The use of stockbrokers is not always the cheapest or best way to deal with these assets and at times (especially where the value of the shares is relatively low) it may be more appropriate to sell the shares through the share registrar of the company concerned. For example, shares issued under an employee share scheme or in some banks and utilities do have a low cost share transfer scheme available. These options should be explored before instructing brokers.  

Cases in which the OR is not in possession of the share certificates  

11. If there has been no response to the actions taken to obtain the certificates from the bankrupt or director, the OR must still deal appropriately with the shares.  Please refer to step 6. above. In such circumstances the cost of the sale will need to include the cost to the OR of signing an indemnity for the missing share certificates or the cost of duplicate certificates. Thus, it is anticipated that unless the nominal value of the shares held is £10,000 or more, the OR should not incur the cost of insurance to indemnify the indemnity.  

Cases in which the cost of sale is greater than the realisation 

12. While a case remains open, any dividends payable from the shareholding should be sent to the OR as trustee or liquidator. Any dividend payments received should continue to be paid into the insolvency estate to defer costs. However, the OR should not propose to keep low value shareholdings on the protracted asset realisation register. If, at the point the OR is ready to apply for his/her release, the cost of selling the shares would still be more than the realisation made, the OR should consider disclaiming his/her interest in the shares.

13. Where a disclaimer is appropriate, prepare forms NODIS (Notice of Disclaimer) and DMRCT1 in duplicate. Have them signed by the OR and send to court for sealing . When returned by the court, send copy NODIS to each person to be notified, having completed Part 3 of the form with the appropriate names and addresses. Complete form DMRCT2 and send one copy to court and another one for the file. Note LOIS (CA08/CA15). As an interested party the company registrar will be issued with a copy of the disclaimer (Rule 4.188 or Rule 6.179).

Selling the shares

14. Write to the broker instructing them to sell the shares on the official receiver’s behalf. Enclose the following: 

  1. a certified copy of the bankruptcy or winding up order, and 
  2. proof that the OR has been appointed as trustee or liquidator, i.e. a copy of form NNM (Notice of no meeting) or a brief note to the effect that the official receiver is liquidator of the company under section 136 of the IA1986 
  3. the original share certificates, if available. 

15. Where the share certificates have not been produced, it should have been pre-arranged with the broker (by an AOR/examiner) to obtain a duplicate certificate and/or arrange indemnity cover for the official receiver in respect of the sale. The OR will need to confirm this in his/her letter of instruction and the broker will deduct the appropriate charge for this from the costs of the sale. Refer to step 9

16. Some offices also include a signed and stamped CREST transfer form with the original letter of instruction as it speeds up the process although this is not essential.

17. If a CREST transfer form was not sent to the brokers with the original letter, it will be prepared by the broker and sent to the office for signature by the official receiver. Upon receipt by the OR, the CREST transfer form must be dealt with urgently. The form should be signed and stamped by the official receiver or, in his absence by an AOR acting as deputy official receiver, and returned to the broker within 2 days of receipt.  

18. Where the shares are reported by the broker not to be immediately saleable, refer to the examiner for instructions as to whether or not they should be added to the protracted assets realisations register or disclaimed/gifted to charity.

19. If the shares are to be disclaimed please refer to steps 12 and 13 for guidance on how this is done. Where the value of the shares are to be reviewed at a later stage, include them on the protracted assets realisations register and send to the RTLU as per your local procedure. Record all actions taken on LOIS where appropriate. (CA08/CA15).

20. When the shares have been sold and a remittance has been received from the brokers, ensure that the LOLA estate ledger is credited appropriately. Place the papers on the office file and update LOIS (CA08/CA15). 

21. In all circumstances the OR must let creditors know what has happened to the shares. This should be as part of his/her report to creditors, notice of the intention to apply for early discharge (bankruptcy only) or release notice.