Equity Investment, Control, and Secured Lending in Private Companies: A Doctrinal Analysis
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Author Elaine Obika
Date 21st February 2026
INTRODUCTION
Investment in a private company is never just a financial transaction. It is a negotiation of power, risk, control and long‑term consequence, all mediated through the language of company law. When an investor seeks a shareholding, a managerial role, annual returns and secured lending rights, the law responds with a dense framework of duties, protections and constraints. This essay traces that framework, showing how doctrine shapes the practical realities of business relationships.
The legal and commercial considerations arising when an investor seeks both equity participation and secured lending within a private company reveal the complex interplay between company law, creditor protection, and tax policy. This essay examines these issues through the hypothetical scenario of Carl, an investor proposing to acquire a significant shareholding in Horatio’s company, participate in management, receive annual returns, and advance substantial secured loans. The analysis explores the legal mechanics of share transfers, the risks of unintended partnership, dividend governance, the nature of security interests, creditor ranking, and the tax implications of transferring a business to a family member.
1. Acquiring a Significant Shareholding: Transfer Formalities and Control
A transfer of shares in a private company engages both equitable and statutory principles. While a contract of sale may confer an equitable interest on the transferee, legal title does not pass until the transferee is entered in the register of members. The Companies Act 2006 requires a “proper instrument of transfer” before registration, typically a stock transfer form specifying consideration, share particulars, and the parties’ details. The company must register the transfer within two months unless it lawfully refuses, in which case reasons must be provided.
The transfer of a substantial shareholding may also trigger the regime governing Persons with Significant Control (PSC). An individual holding more than 25% of shares or voting rights, or possessing the right to appoint a majority of directors, must be entered on the PSC register and notified to Companies House. This ensures transparency in corporate control and imposes compliance obligations on the company.
Horatio must also recognise the commercial reality that selling shares dilutes ownership and may alter the balance of power within the company. The law prohibits the allotment of shares at a discount, reinforcing the principle that share capital must reflect genuine value.
2. Participation in Management: Avoiding Unintended Partnerships and Preserving Control
Carl’s desire to be “involved in the running of the business” raises the risk of inadvertently creating a partnership or quasi‑partnership. Partnership status is determined by substance rather than form; shared management, profit‑sharing, and mutual agency may give rise to partnership obligations even without express agreement. This could expose Horatio to joint liability and undermine the corporate veil.
To preserve control, Horatio may consider structuring the shareholding through classes of shares with differentiated voting rights or weighted voting provisions. Such mechanisms can protect founder‑control, particularly in the event of disputes or attempts to remove directors. The jurisprudence in Bushell v Faith illustrates how articles may validly entrench a director against removal by ordinary resolution.
Clear governance arrangements are essential to prevent conflict, particularly where investor involvement may blur the line between shareholder oversight and managerial authority.
3. Annual Returns: Dividend Governance and Creditor Protection
The declaration of dividends is governed by both company law and the company’s articles. Dividends may only be paid out of distributable profits, determined by reference to relevant accounts. Under the Model Articles, shareholders may declare a dividend by ordinary resolution, but cannot exceed the amount recommended by the directors. This reflects the principle that directors, as managers of the company’s affairs, are best placed to assess financial capacity.
Carl, as a shareholder, may influence dividend policy through voting power, including the statutory right to remove directors. However, Horatio must balance shareholder expectations with the interests of creditors. The Supreme Court in BTI v Sequana confirmed that directors must consider creditor interests when insolvency is probable, and that this duty arises before insolvency becomes inevitable. Dividend decisions therefore require careful assessment of the company’s financial position.
4. Secured Lending: Mortgages, Charges, and Debentures
Carl’s proposal to lend £1.1 million to the company necessitates robust security arrangements. Security may take the form of a legal mortgage, fixed charge, or floating charge. A legal mortgage transfers title to the lender subject to the equity of redemption, whereas a fixed charge grants the lender control over a specific asset without transferring title. Floating charges, by contrast, hover over a class of circulating assets and crystallise upon default or insolvency.
The distinction is doctrinally significant. Fixed charges rank ahead of floating charges in insolvency, and impose greater restrictions on the company’s ability to deal with the charged asset. Floating charges offer flexibility but are subordinated to fixed charges and certain preferential debts.
Security is typically documented through a debenture, which may contain both fixed and floating charges. Care must be taken to distinguish “security” (charges over assets) from “securities” (transferable instruments such as shares). Horatio must also disclose any existing charges, as prior security interests may affect priority.
Mortgages over land must comply with the Law of Property Act 1925, requiring creation by deed expressed to be by way of legal mortgage. Equitable mortgages may arise where formalities are incomplete, but they offer weaker protection, particularly against bona fide purchasers without notice.
Personal guarantees may also be required, exposing Horatio to personal liability notwithstanding the principle of limited liability.
5. Creditor Ranking in Insolvency
In the event of insolvency, the priority of secured creditors is determined by the nature and timing of their charges. Fixed charges rank first, followed by preferential creditors, floating charges, unsecured creditors, and finally shareholders. Registration of charges is essential to preserve priority; failure to register may render the charge void against a liquidator or administrator.
In the hypothetical scenario, earlier‑registered fixed charges take precedence over later ones, and all fixed charges outrank the floating charge. The floating charge holder receives only the residual value after satisfaction of fixed‑charge creditors.
6. Tax Implications of Transferring a Business to a Family Member
The transfer of a business to a family member engages capital gains tax (CGT), inheritance tax (IHT), and potential reliefs. A disposal to a non‑spouse triggers CGT on gains above the annual exemption, calculated using market value if the transfer is not at arm’s length. For IHT purposes, transfers into discretionary trusts are chargeable lifetime transfers taxed at 20%, with further tax if the transferor dies within seven years.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) may reduce CGT to 10% if conditions are met, including holding at least 5% of voting rights and being an officer or employee for the requisite period. A company purchase of own shares may also achieve capital treatment if the shareholder fully withdraws from the business and HMRC clearance is obtained.
Trusts offer non‑tax advantages, including asset protection, control retention, and flexibility in beneficiary arrangements, but attract high income tax rates and periodic IHT charges. Business Property Relief may mitigate IHT where qualifying business assets are transferred.
Gifts of shares may also be effective, particularly where Business Property Relief applies, though the recipient inherits the donor’s base cost for CGT purposes.
Conclusion
The scenario involving Carl’s proposed investment, managerial involvement, and secured lending illustrates the multifaceted nature of corporate and tax law in private companies. Share transfers require strict compliance with statutory formalities and may alter control dynamics. Managerial involvement must be carefully structured to avoid unintended partnerships or loss of founder control. Dividend policy is constrained by statutory capital maintenance rules and creditor‑protection duties. Secured lending engages complex doctrines of mortgages, fixed and floating charges, and creditor priority. Finally, the transfer of a business to a family member triggers significant tax considerations, mitigated by reliefs and strategic structuring.
Taken together, these issues demonstrate the importance of coherent legal planning, precise documentation, and an understanding of the doctrinal foundations that govern corporate ownership, control, and finance.
BIBLIOGRAPHY
Primary sources
Cases
BTI 2014 LLC v Sequana SA and others [2022] UKSC 25
Bugsby Property LLC v LGIM Commercial Lending Ltd, Legal and General Assurance Society Ltd [2022] EWHC 2001 (Comm)
Bushell v Faith [1970] AC 1099
Chalcot Training Ltd v Ralph [2021] EWCA Civ 795
Dickinson v NAL Realisation (Staffordshire) Ltd [2017] EWHC 28 Ch
Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492
Pender v Lushington 6 (1877) Ch D 70
Prest v Petrodel [2013] UKSC 34
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Companies Act 2006
Inheritance Tax Act 1984
Insolvency Act 1986
Law of Property Act 1925
Stock Transfer Act 1963
Taxation of Chargeable gains Act 1992
The Companies (Model Articles) Regulations 2008
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