The sale/transfer of family company shares between spouses has been a topical issue recently. The parties who invested a lot of time, effort and money in their business find it difficult to distinguish between the separate legal personality of the company and their own assets. It is tempting to think of your company’s money as your own, especially when the spouses are the only shareholders and directors of the company. However, treating and handling company’s assets as your own may result in grave consequences.
While a simple transfer for no value between the parties would not pose issues, devising a sale of shares to one another becomes problematic where the purchase price money has to come out of the company’s funds. Again, it is very tempting to just dip into the company’s ‘pocket’. After all, the parties may feel that it is their hard-earned money.
However, it is important to think of a company as a separate third party holding the money. It could be that one of the spouses (the buyer) would end up being a company’s debtor as the money taken from the company’s account will be treated as a loan to a shareholder/director. An alternative would be company purchasing its own shares which involves a lengthy and complex statutory procedure.
If the parties are thinking of winding up the company soon after the sale, it would be risky to think that ‘borrowing’ money from the company would be somehow a temporary situation, as the liquidator would be under the duty to make sure that the company’s debts are collected. It would create a perverse situation where in the end, after distribution of company’s assets, you would perhaps have enough money to pay off the debt, but you would not be able to access it unless you pay off the debt.
It is therefore crucial to involve your advisors (accountants, lawyers) right from the start who should be able to give you appropriate advice.