When you are working closely with another individual, particularly on a joint business venture, it is almost inevitable that disagreements will occasionally happen. This is part and parcel of life, and in the vast majority of cases, these disagreements will be quickly forgotten and cause no lasting damage.
However, in some instances disputes between company directors or business partners have the potential to escalate and cause long-term damage to business success. When these disagreements lead the company towards the brink of insolvency, action needs to be taken – and quickly. 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 can help preserve the company’s value and allow for trade to continue. In the end, however, the solution might involve removing a director from the limited company, or liquidating regardless.
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. If both parties are resolute in their own views and refuse to compromise or concede to the others opinion, this can cause operations to grind to a standstill and the quality of output to decline, putting the entire future of the business in jeopardy.
So what are the options if one director wants to enter voluntary liquidation and move on, but the other wishes to continue?
We often see instances where one director has had enough and wants to walk away from the business, while the other director is keen to continue running the company. In theory this can be achieved by the director who wants to leave simply resigning from their position and leaving the remaining director in charge. However, in reality it is rarely this simple.
The departing director is often wary about handing over full control to the remaining director and would instead prefer the company to be fully closed down knowing that all outstanding liabilities have been taken care of.
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.
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 for the breaking the deadlock that has arisen. The court will examine whether there are any alternative solutions which could allow the business to continue trading while also settling the deadlock, such as through a sale of shares, before granting the winding up of the company.
If this is not possible and a petition is given, as long as the company is solvent it will enter a 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.
If not swiftly addressed, director disputes can put extreme pressure on a business and its financials; in some cases this can lead to the company falling into insolvency.
When a company is insolvent, directors have certain duties and obligations. One of these is to place the interests of creditors above those of directors and shareholders. Therefore, regardless of the ongoing disputes between directors, these differences need to be put aside while the company’s issues are dealt with. This is not just best practice; it is the law. Failure to prioritise creditors, or to actively engage in any action which may worsen their position (such as continuing to trade and running up further debt), could see directors being investigated for wrongful trading and risk being disqualified from acting as a director for a period of up to 15 years.
If you are in this situation, regardless of whether you are the one who wants to keep the company active or the one who would prefer to close it down, it is important to remember your responsibilities and obligations as a company director. Doing nothing is not an option. Left alone, the situation is only likely to get worse unless you are all able to reach a mutually agreeable decision as to the company’s future.
If your business is suffering, you must put your differences aside and place your company and its creditors first.
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 today on 0800 644 6080 arrange a free same-day consultation with any of our 78 Offices.