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Director disputes and insolvency

Director disputes and insolvency

24 July 2019:  The Hitchin office has seen an increase in disputes between company directors/shareholders in owner managed businesses. 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.

Resolving a deadlocked dispute

When two directors in a business disagree on a matter of strategy, or they simply feel there is no future in their working partnership, the situation is termed ‘deadlock.’ There are no additional board members to cast a vote on the next step.

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.

When one director wants to liquidate and the other does not …   

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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.

Where directors/shareholders do not agree on a voluntary winding up or a share transfer/sale, 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.

Where a company is solvent, deadlock/dispute situations may lead to the cessation and a members’ voluntary liquidation.  All parties do not wish to be bound by the company and agree to a wind up the company. Hereby all business assets are sold, monies distributed between the shareholders and the company is formally wound 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.

What directors should do?

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.

BRI’s team of experts deal with such disputes and deadlocks on a daily basis and assist businesses in looking at the options available so please contact any one of our experienced management team for further advice.