Shares and other traded investments

Part 8 Shares and other traded investments

October 2012  

31.5.181 What is a share?

A share is an entitlement to the profits of a company. Some shares offer the holder the right to participate in the management of the company through voting at meetings of the companies members. Shareholding is also a vital source of long term funding for companies. The amount a holder will receive will depend upon the success of the company and the nature of their holding (see Chapter 75, part 12 for further details). 


31.5.182 Holding of Shares – certificates

Shares in a limited company or an unquoted public limited company will normally be held by way of a share certificate. The certificate will normally state the name of the company, the name of the shareholder, the number of shares held and the type/class of share along with the nominal/ face value of the shares. It is possible to hold share certificates for publicly quoted companies although shares held this way are usually more expensive to trade. 


31.5.183 Initial action where insolvent holds shares – certificates held

Where an insolvent claims to own shares, the official receiver should verify that the bankrupt or company is the registered owner of the shares. Although it is useful to have sight of any share certificates, checks should also be made by writing to the company registrar. Under no circumstances should a sale be commenced without ensuring that the insolvent is the registered owner of the shares and, ideally, with the share certificates in the possession of the official receiver.  Where a bankrupt holds shares in their name but a claim is made that the shares are held beneficially for another it will be for the bankrupt or the other party to provide evidence regarding ownership of the shares.   


31.5.184 Recovering the share certificate

Any share certificates that are recovered by the official receiver should be kept in the office safe and recorded in the office’s valuables register. A receipt should also be issued for any certificates received. Where certificates are required for day to day reference copies should be taken.


31.5.185 Lost share certificates

If a share certificate has been lost, the registrars will require an indemnity to be signed before the shares are sold. Before giving such an indemnity the official receiver should take steps to purchase indemnity insurance cover only if the actual value of the shares held is £10,000 or more. The shares should only be realised if the official receiver is able to obtain cover at a premium which results in a net benefit to the estate of the realisation. For lost share certificates, the amount of the indemnity is the current value of the shares. Insurers will base the premium on this amount but do recognise that share prices may go up or down (see also Chapter 49 Part 2 - Insurance.) Some brokers offer a service where they obtain the indemnity cover on behalf of the official receiver.


31.5.186 Lost share certificates – writing to the registrar

It is also prudent to ensure that the registrars will accept that the official receiver can sign transfer forms in place of the bankrupt or directors as a delay once the sale has commenced could result in problems meeting the settlement period (see paragraph 31.5.200) In company cases a copy of the winding up order, together with a short covering letter stating that under the provisions of section 136 of the Insolvency Act 1986 the official receiver is liquidator of the company, should be sufficient.  In bankruptcy cases the registrars should be provided with a copy of the bankruptcy order and the notice of no meeting form NNM, together with a short letter of explanation that as from giving this notice to the Court, the official receiver is trustee of the bankrupt's estate by virtue of section 293(3) of the Insolvency Act 1986.


31.5.187 Holding of Shares – electronic holding

Shares can also be held electronically (via a brokerage service, nominee service, or via Crest (see paragraph 31.5.189). Most high street banks now offer a nominee/brokerage service where they will be registered as the holders of the shares while the investor retains the beneficial interest in the holding (i.e. any dividends due and the sale proceeds when the shares are sold will be payable to the investor). One potential limitation with this type of service is that it may not be possible for the investor to receive all of the associated benefits, e.g. the ability to vote at shareholder meetings, or receive discounts available to shareholders.


31.5.188 Initial action where insolvent holds shares – certificates not held

Where the shares are held by a broker or through a nominee service (see paragraph) the broker/ nominee should be informed of the making of the insolvency order and the consequences of the insolvency and asked to note the official receiver’s interest.

Enquiries should be made of the broker’s/ nominee’s charges for dealing with the shares.


31.5.189 Crest

Crest is the Stock Exchange's paperless settlement system. Under Crest, shareholdings are recorded electronically, avoiding the need for paper share certificates, although shareholders can choose to keep their share certificates if they so wish. Shareholders have the option of either holding their shares in nominee names with their brokers or remaining as a registered shareholder as a sponsored member of Crest. If an insolvent has been dealing under Crest and has no share certificates, checks should be made with their broker who will have a record of the holding whether the insolvent had nominee holdings, or was a sponsored member. The broker should be contacted promptly to prevent any unauthorised dealing in the shares taking place after the date of the insolvency order.


31.5.190 Stock exchange

A stock exchange has two main functions, firstly to enable companies to raise new capital through the issue of new shares (known as the primary market) and secondly to enable the efficient trading of those shares (known as the secondary market). The market is made up of market makers who are traders who buy and sell (bid and offer) securities, therefore making a market for them. Throughout the trading day, the market makers are obliged to display to the market, for all stocks in which they are registered, their bid (buying) and offer (selling) prices and the maximum bargain (transaction) size to which these prices relate. These prices are fixed to other Exchange member firms. Market makers compete to have the best quote and make their income by buying and selling at a profit. Market makers' bids and quotes are carried on the Stock Exchange Automated Quotations (SEAQ) system which is a continuously updated computer database containing price quotations and trade reports in UK companies. Any broker employed by the official receiver will deal with the market makers.  For a company to be listed (or quoted) on a stock exchange the company must meet the requirements of that particular stock exchange. The principal trading market for trading shares in the UK is the London Stock Exchange. 


31.5.191 Valuing shares – Quoted companies

The valuing of shares in a quoted company is the same in principle as valuing the shares in a unquoted company (see paragraph 31.5.194), however in practice the availability of an efficient market (i.e. a stock exchange) with regular trades means that more reliance can be placed upon the market price of the shares and the valuation models serve more as a tool for confirming them values. It is for anyone wishing to sell the shares to decide whether they wish to accept the market price.


31.5.192 Valuing shares – taking into account the costs of sale

If the official receiver is intending to sell shares then a broker should be instructed.  It is important that the official receiver considers the brokers fees in carrying out the transaction before deciding whether to instruct the agent.  Individual trades of shares are limited to shares in the same company and with the same shareholder. This means that if there are a number of shares in the same company with different insolvents holding the shares then each of the holdings needs to be dealt with in a separate transaction.


31.5.193 Selling Shares – Quoted companies

The official receiver should bear in mind ordinary commercial considerations when deciding the most beneficial way of dealing with shares. Where the shares are held by brokers, in a nominee account, or where it is obvious that a registrar has been involved in previous dealings of the insolvent‘s shares enquiries should be made as to the cost of them continuing to act and to realise the holding. When considering whether to use the services of an alternative broker consideration should be given to the costs of transferring the shares. The transfer fee will normally be either for the transfer of dematerialised securities or alternatively the fee for converting the securities into a paper holding and then potentially a ‘transfer in’ fee charged by the chosen selling broker.  Where the holding is held in paper form the fee structures of competing brokers also needs to be considered carefully. There are normally fees for certificated trades and possibly electronic trades with free ‘transfers in’. The fees can be expressed as either a fixed fee or as a percentage of the transaction price (where the fee is expressed as a percentage there will normally be a minimum fee cap in place.)  Care should be taken when selling shares where the certificates have been lost as an indemnity may be required (please see paragraph 31.5.185). The cost of the indemnity would be an additional consideration when deciding how to deal with a holding.


31.5.194 Valuing Shares – Unquoted companies

Where companies are unquoted there is no readily available market to indicate the value of shares and it can therefore be difficult to place a value on them. There are a number of different models or calculations that can be used to calculate the value of the shares.

As a guideline minimum amount the net asset value (i.e. the net value of the company’s assets) of the company may be used. This figure is useful as a guide but this model has serious limitations as it fails to account for the earning potential of the underlying assets of the company. Another potential pitfall is that the fixed asset values quoted in the company’s balance sheet will usually be out of date.


31.5.195 Considerations when valuing unquoted shares

When the official receiver sells shares in unquoted public or private companies, care should be taken to ensure that a proper price is obtained for them. Valuing such shares is notoriously difficult. The first offer for a parcel of shares should not be accepted without the official receiver first confirming that the offer made represents a fair value for the shares. It is unlikely that any 2 valuations of parcels of such shares would provide the same value. When considering an offer to purchase a parcel of shares, the official receiver should take the following into consideration:  

  • What the current balance sheet shows the value of the company as a whole to be, and what the current balance is on the company's last profit and loss account.
  • What percentage of the total shares the insolvent's holding represents. The larger the percentage of the total shares held, the great the control the shareholder has over the company and the greater the relative value of the shares.
  • Whether any shares have recently been sold, and for what price.
  • What the dividend history of the company is. The value of shares may be affected on the basis of the expected dividends attached.
  • Whether the shares are fully or partly paid up. Shares that are only partly paid up carry a potential liability which should be included in calculation of their value.
  • Whether any restrictions have been placed on the transfer of shares in the company. See also paragraph.
  • Any other factors applicable to the company itself.


31.5.196 Considering an offer to buy shares in an unquoted company

Where there is any doubt as to whether an offer made to purchase shares in an unlisted company is a fair one, the official receiver should not hesitate to obtain a valuation from an accountant or other competent valuer. In applicable cases they may also become involved in the negotiation of the sale price. Great care should be taken when relying on information supplied by the company in which the shares are held or by any company or person closely associated to it. Costs incurred in obtaining professional assistance as sales or valuations should be paid from the insolvent's estate in the usual way.


31.5.197 Restrictions on transfer

Restrictions on the right of a member to transfer his/her shares do not apply to a personal representative or trustee in bankruptcy of a deceased or bankrupt member who seeks to be registered as the holder of the shares which have vested in him/her (Bentham Mills Spinning Co (1879) 11 ChD 900 ) unless the articles expressly apply restrictions on transfers to such cases as well.


31.5.198 Refusal to register transfers

The company's articles may give directors the power to refuse to register a transfer of shares. The Companies (Model Articles) Regulations 2008 (if adopted) gives directors that power. However, the directors must exercise their power to refuse to register a transfer of shares, in good faith and for the benefit of the company. There is extensive historical case law where the court has ordered that transfers be registered where the directors acted inappropriately in refusing to register such transfers. It is unlikely that directors would refuse to register transfers. 


31.5.199 Other members’ rights of pre-emption over shares

The other common restriction on the transfer of shares found in the articles is a provision that a member of the company who wishes to transfer his/her shares to a transferee who is not already a member, shall first offer them to the other members of the company at a price ascertained in accordance with a formula set out in the articles, or at a fair price at which the shares are valued by the directors or by the company's auditors, and that the member may transfer the shares to his/her proposed transferee only if other members do not exercise their right of pre-emption. Before commencing a sale it would be prudent to check that the company's articles do not contain such a provision. No provision is contained in The Companies (Model Articles) Regulations 2008.

The shares would be transferred to the purchaser by a 'proper instrument of transfer' Companies Act 2006 section 770(1), the forms for such a transfer being contained in the Stock Transfer Act 1963.


31.5.200 Selling of Shares- on the stock exchange

Where the official receiver is trustee/liquidator he should sell any publicly quoted shares provided that the sale of those shares achieves a benefit to the estate.  Websites such as or give up to date share prices for listed companies.  It is important that the official receiver considers the value of the shares as well as the brokerage fees before conducting a sale.  A broker should not be instructed to carry out the sale unless it is absolutely clear that there will be a benefit to the estate after considering the brokers fees and charges.  It should be noted that only shares forming part of a single estate and relating to a single company can be dealt with in one transaction.

Under the London Stock Exchange system sales and purchases of shares need to be completed within 3 days of the transaction date, this is often referred to as “T + 3”.  Due to this tight deadline it is imperative that the broker instructed to conduct the sale has the appropriate documentation and information to enable him/her to complete the transaction within this deadline. 


31.5.201 Shares with little or no realisable value – receipt of dividends

In cases where the cost of the sale of the shares would be greater than the realisable value of the shares, while the case remains open and where the official receiver is liquidator or trustee, the official receiver should receive any dividends payable as a result of holding the shares and pay the amounts received into the insolvency estate.


31.5.202 Disclaiming shares with little or no realisable value

If it is not possible for the official receiver to dispose of the shares in any other way, the official receiver should disclaim the shares. Low value shareholdings should not be kept on the long term long term asset realisation register. A copy of the disclaimer should be sent to the company registrar [Note 1].


31.5.203 Disclaiming Shares

If the shares are of little or no value, or there would be substantial costs incurred to facilitate a sale, a disclaimer should be considered. Further details concerning the disclaimer of shares is contained in paragraph 34.29.


31.5.204 Disposing of shares – official receiver to inform creditors 

In all circumstances creditors should be informed of how shares have been disposed of whether they have been sold or disclaimed. Creditors may be given this information in the official receiver's report to creditors, notice of an application to apply for early discharge (bankruptcy) or notice of intention to apply for release as appropriate.


31.5.205 Derivatives trading

A derivative is a financial instrument that is used for the purposes of ‘hedging’, It is referred to as a derivative as its value is ‘derived’ from the security to which it relates. These instruments allow parties to ‘hedge’ by transferring risk ,at a cost, to one another. The markets dealing of derivatives is a specialist field and membership of the particular markets is required to be a trader on those markets. The principle market for derivatives in the UK is the NYSE LIFFE London. Common types of derivative are referred to below in paragraphs 31.5.207, 31.5.208, 31.5.209, 31.5.210.


31.5.206 Employment of a broker to deal with derivatives

Where the official receiver encounters an insolvent who holds derivatives (e.g. futures, warrants, or options) then a broker should be employed to assist in the realisation of these items. This paragraph does not apply to the options granted under a Save As You Earn (SAYE) scheme or similar.


31.5.207 Warrants

Warrants are quite similar to options in the way that they operate however options are standardised in terms of their conditions warrants will be specifically drafted by the issuer. A warrant will usually be issued by the company whose shares are covered by the warrant whereas an option is a contract between two investors.   

The exercise of a warrant will impact upon the issuing company in that exercising a warrant will potentially dilute shareholders
‘equity’, the exercise of an option on the other hand would not normally directly impact upon shareholder’s  equity.


31.5.208 Options

Options, like warrants, give one party the option of purchasing/selling assets at a predetermined price. The assets concerned are normally quoted shares.  The two types of option are the put option (which is an option to sell) and a call option (which is an option to buy). Warrants unlike options are more standardised in their wording and operation. Options work by giving the purchaser the right (but not obligation) to buy or sell shares at a set price (referred to as the strike price) subject to certain time constraints. The option must either be exercised on a given date (European option) or by or on a given date (US option). These options are tradable derivatives options and differ from employment or Save As You Earn (SAYE) options (see paragraph 31.5.170)


31.5.209 Futures  

Futures contracts can take many guises but one of the more common are commodities futures contracts. A futures contract is a contract for a transaction to occur at some point in the future. One example would be where a farmer who has yet to grow a crop may be concerned that the price he is set to receive would be less than the current market price of the crop which he is planning to grow. To protect against this he can enter a futures contract to set a price now so that he knows what he shall receive in the future.


31.5.210 Commodities

A commodity is another name for any marketable resource, be it gold, steel, cotton, coffee or wheat. While commodities can be traded in their own right there exists a substantial derivatives market in these items (see paragraph 31.5.211) London’s main commodity markets divide between metals and soft (foodstuff) commodities.


31.5.211 Realising financial derivatives and commodities

The markets dealing in financial derivatives and commodities are specialised and membership of the various markets is required to be a trader on those markets. If the official receiver is dealing with an insolvent who had options, futures or commodities as investments then a broker should be employed to assist in the realisation of these items. Where the insolvent was a member of a recognised investment exchange the specialised insolvency procedures contained in Part VII of the Companies Act 1989 apply, which are covered in more detail in Chapter 59 Part 3 - Unusual businesses and related assets.


31.5.212 Other dealings on the Stock Exchange

The following are also traded on the Stock Exchange:- 

  • Eurobonds - long term loans issued in a currency other than that of the country of issue. The Eurobond market is dominated by large international institutions, and it is difficult to sell them in bargains worth less than £100,000. It is therefore unlikely that the Official Receiver would deal with the realisation of Eurobonds. 
  • Depositary receipts - negotiable certificates representing a company’s shares. Often used by companies from developing countries. These are marketed internationally to sophisticated investors, mainly financial institutions.  
  • Overseas equities - ordinary shares issued by non UK companies. Securities are eligible for trading if they are listed on any stock exchange recognised by the London Stock Exchange. Share prices are usually quoted in the home currency of each country and transactions are settled through the local settlement system.  
  • UK Gilts - the Stock Exchange offers a secondary or trading market which allows investors to buy and sell gilts. The traditional link between the Bank of England and the Exchange is the Government Broker, a member of the Exchange’s board. He supervises the Bank’s own dealing room which trades with the firms registered as gilt - edged market makers (GEMMs).  
  • Bonds or fixed interest stocks - usually issued by companies or local authorities. The market for fixed interest securities is based on a competing market maker system. Market makers register with the Exchange in specific securities and are obliged to offer to buy and sell up to a marketable quantity of stock at a firm price to other member firms, but are not obliged to buy or sell to other market makers.


31.5.213 Dealing with certificates recovered

Any certificates should be recovered and held in the office safe pending realisation, or the appointment of an insolvency practitioner. To realise such items, a broker should be employed to act on the Official Receiver’s behalf.


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