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Director disputes – when one wants to liquidate and one doesn’t – what next?

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Director disputes – when one wants to liquidate and one doesn’t – what next?

Reviewed: 25th August 2017

Disputes between company directors or business partners have the potential to escalate and cause long-term damage to business success. But when there are only two directors, each with a 50/50 share in the company, how can the situation be resolved?

Dispute resolution in the form of mediation can help, using experienced business advisors to negotiate a way forward. In the end, however, it might involve removing a director from the limited company, or liquidating regardless.  

Resolving a deadlocked dispute

When two directors hold equal shares in a business and disagree on a matter of strategy, or they simply feel there is no future in the partnership, perhaps due to impending divorce, the situation is termed ‘deadlock.’ There are no additional board members to cast a vote on the next step, and stalemate ensues.

This can be disastrous, even when a business has been relatively successful in the past. Focus is taken away from running the operation day-to-day, and placed on trying to resolve these huge issues.

So what are the options if one director wants to enter voluntary liquidation and move on, but the other wishes to continue?

Special grounds for winding up a company

In this situation, the shareholder wishing to exit the business may apply for a ‘just and equitable’ winding-up. This allows the court to decide whether liquidating the business is the best option, and can break the deadlock that is holding back progress.

If the company is solvent and a petition is granted, the company will enter the Members’ Voluntary Liquidation (MVL) process whereby all business assets are sold, monies distributed between the shareholders, and the company closed down.

Although not ideal for the party who wants to carry on with the company, they may be able to start afresh with a new business, using the existing contracts or customer base. So are there any other options to resolve a 50/50 dispute between shareholders?

How can a director be removed from a limited company?

Buying out the partner’s shares

If the shareholders have entered divorce proceedings, the court may provide for a limited company divorce settlement whereby the remaining director buys out the other shareholder. If finances allow, this would remove them as a company director, and permit the business to continue under sole directorship.

Some disputes involve directors falling out due to a lack of communication, however, or a significant difference in viewpoint, rather than because a marriage is ending. A just and equitable winding up may be equally effective in these circumstances, allowing the shareholders to move forward, but the next step will be placed in the hands of the courts.

Resolving shareholder/director disputes is a complex area of business, and it’s vital to obtain professional guidance on the best way forward. Our experts at Real Business Rescue will provide the advice you need using sound commercial knowledge and extensive experience. Call to arrange a same-day consultation free-of-charge. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 72 UK offices or a place of your convenience.

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