Director resignation

Director resignation

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Client is a small limited company with two Directors (A & B) who each hold 1 x £1 share.

(A) would like to resign as Director, but retain his shareholding. He is a creditor of the company having ploughed quite a lot of money into the business when it started up.

I think I’m right in saying that if (A) leaves: his liability is limited to the £1 he invested in his share; and that he will remain a creditor of the company but could potentially lose some or the entire amount outstanding to him if the company got into difficulties later down the line.  But how much control, if any, will he retain in the company as a 50% shareholder? Does he have a say in the day to day running of the company? And does he have any say in whether dividends are issued – and if so, can he influence or decide on the amount of these dividends?

Any advice would be most appreciated.

One more minor point – I’m a newly qualified AAT member and have been a quiet observer of Accounting Web for some time. I realize the answers to these questions may seem obvious to some, but please bear in mind that I probably don’t have as much experience as most of you (i.e. please be nice!!)

Replies (20)

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By User deleted
06th Jul 2015 17:39

Advise A never to resign as the director. If he does resign he will be a very big loser. 50:50 shareholding/directorship is a disastrous arrangement. If A resigns B will be in full control and A will be at the receiving end of anything and everything that B does.

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By Tim Vane
06th Jul 2015 18:03

Get hold of a copy of the company's articles of association. These will be available from Companies House. It is very possible that the company was incorporated using the model articles.

Then you can see what powers the shareholder has. Essentially, as taxguru says, it is probably not an advisable course.

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By johngroganjga
06th Jul 2015 18:23

And if he resigns he will lose his right to claim entrepreneur's relief on any sale of his shares realising a capital gain.

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By umeshg
07th Jul 2015 06:30

A very good reply from Basil

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By petersaxton
07th Jul 2015 07:29

Why?

"(A) would like to resign as Director"

Why?

All the points mentioned above are very good reasons not to resign. Even if they were not valid reasons why would anybody pump a load of money into a company and then want to resign as director?

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By Banjo
07th Jul 2015 10:56

Thank you for all your helpful responses – especially Basil for going into so much detail.

 

Tim Vane – I’ve had a look at the articles of association and you are right, it was incorporated using the model articles. Under the section “prescribed particulars” it states that “each share has full rights in the company with respect to voting, dividends and distributions”.

 

John Grogan & Basil – many of the points you raised had not occurred to me and I can see that this is something that I should not be giving advice on, least of all because of the conflict of interest.  I really appreciate you raising these points. 

 

Peter Saxton – good question. The reason (A) gave for wanting to resign is that he feels his involvement in the company has become a vicious circle of work for no reward and, with his other commitments, the situation is just not working for him.  He has not specified why he wants to retain his share though. 

 

NB- The company has only been going a couple of years, has made a loss each year and has not actually paid any dividends yet.

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By petersaxton
07th Jul 2015 12:17

Limit work done

There's nothing to stop the director limiting their involvement but remaining a director.

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By User deleted
07th Jul 2015 12:24

Register a charge

Is there a restriction on registering a charge at CoHo? With regard to the fact the A is both the creditor and the director filing the submission?

 

In which case - register a charge - resign as director. Make very clear the revised terms for repayment.

 

If he's getting very little/no return at the moment, then whether he's a director or not that will not change into the future.

 

Forcing the company into liquidation is then the only other option that I would entertain with regard to repayment of my debt - Just ensure that all accounting records are made up correctly to the point that you resign, then any 'bad feelings' etc that could lead the other director to report fraudulently, or trade illegally etc. would not be your liability.

And then, if you are still unable to recover the loan you have a good footing to pursue legal action.

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By petersaxton
07th Jul 2015 12:34

Remaining director

could manage the company in such a way that the loans would never be paid so if it was me I'd want to remain as a director.

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By johngroganjga
07th Jul 2015 12:34

I am sure a charge document has to be executed on behalf of the board, so one director cannot do it behind the back of the other one, especially if he is the creditor benefiting from the security.

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By User deleted
07th Jul 2015 15:05

ca06 S860 (2) states that a charge may be 'effected' on the application of a 'person' interested in it.

 

In this respect - not on behalf of the board, but can be registered by A, presumably, as an ex-director.

 

(3) He can bill the company for his fees in registering the charge.

 

(4) & (6) No offence can be commited by the company - for incorrect formats etc - where the application is made by somebody other than the board.

 

In which case, I would register the charge and then send a lovely solicitors letter detailing that as the loan has previously been known as 'repayable on demand' the company shall be wound up forthwith.

 

Just ensure that there are profit reserves available prior to resignation and the notice being filed. Then any dispute becomes the responsibility of the liquidator and worst-case (or maybe best-case from A's perspective), they can chase B personally - if trading illegally/fraudulently

 

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Replying to CptCave:
By johngroganjga
07th Jul 2015 16:00

Disagree

BananaMan wrote:

ca06 S860 (2) states that a charge may be 'effected' on the application of a 'person' interested in it.

No it doesn't. It says that the registration of a charge may be effected by another person.  Twas ever thus, and it has to be the case if you think about it.  Otherwise no charges would ever be registered.  But until the company has created a charge there is nothing to register.

BananaMan wrote:
 

In this respect - not on behalf of the board, but can be registered by A, presumably, as an ex-director

As above - yes A can register a charge, but until the company grants one there is nothing to register.

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By johngroganjga
07th Jul 2015 16:01

We are told that the directer is minded to resign as a director, not that he wants to destroy the company. He owns 50% of it remember.

Where has all this about winding the company up come from? Why would he want he want to put the company into liquidation rather than allow it to prosper and reap the rewards of being a 50% shareholder?

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Replying to DJKL:
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By User deleted
07th Jul 2015 16:20

difference

johngroganjga wrote:

We are told that the directer is minded to resign as a director, not that he wants to destroy the company. He owns 50% of it remember.

Where has all this about winding the company up come from? Why would he want he want to put the company into liquidation rather than allow it to prosper and reap the rewards of being a 50% shareholder?

 

You definition of "prosperous" and mine clearly differ

 

Banjo wrote:

Peter Saxton – good question. The reason (A) gave for wanting to resign is that he feels his involvement in the company has become a vicious circle of work for no reward and, with his other commitments, the situation is just not working for him.  He has not specified why he wants to retain his share though. 

 

 

"work for no reward" implies to me that there is no real worth and/or no real distributions. This may not be the case, but in the absence of "reward" what would you do?

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By User deleted
07th Jul 2015 16:21

Besides, 50% of zero is zero

 

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By johngroganjga
07th Jul 2015 16:28

Whatever you think of the wisdom of his chosen course, and without knowing the financial position and future prospects of the company I am not sure how it is possible to judge its wisdom, we are told that the that the director wishes to retain his shareholding. Presumably he has reasons.

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Replying to SXGuy:
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By User deleted
07th Jul 2015 16:31

Agreed

johngroganjga wrote:

Whatever you think of the wisdom of his chosen course, and without knowing the financial position and future prospects of the company I am not sure how it is possible to judge its wisdom, we are told that the that the director wishes to retain his shareholding. Presumably he has reasons.

 

Agreed - I've also just noted that there is a 21 day time limit to register the charge 'from the date it was created'

Whether that would mean from the date the loan was received or from the date the charge was 'agreed' - presumably the latter.

 

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Replying to Tax Dragon:
By johngroganjga
07th Jul 2015 16:35

Creation

BananaMan wrote:

I've also just noted that there is a 21 day time limit to register the charge 'from the date it was created'

Whether that would mean from the date the loan was received or from the date the charge was 'agreed' - presumably the latter.

I agree that it must be from the creation of the change.

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By User deleted
07th Jul 2015 17:08

So,

Are we at the point where a little additional info is required?

 

To the OP

- What does "work for no reward" mean?

- What are the net assets?

- Is the company profitable?

- Is there any hope of a dividend in the future?

- Is Director B likely to create a second share class and divert all the distributions?

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By Banjo
08th Jul 2015 13:05

Info.. and thank you

Thank you all for the latest responses.  I have to admit that the discussion about the charges went over my head slightly – this is not a topic I’ve come across before. 

 

The company isn’t profitable at the moment; it’s made a loss since it started trading two years ago.  As with any business, they have always hoped that it will become profitable and that they will be able to pay out dividends in the future.  The reality, however, seems to be that they’re not going to be in this position for quite some time, if at all.

 

“Work for no reward” means that the directors are busy managing the shop 6 days a week (it’s a food outlet), helping out behind the counter, dealing with staff and customers – for little financial reward. They are still occasionally loaning money to the company, albeit in smaller amounts – i.e. paying shop assistant salaries from their own money etc.

 

The directors have been friends for a number of years so at the moment, I don’t think (B) is going to divert the distributions.  You never know what might happen in the future though.

 

I actually responded to the client yesterday, erring very much on the side of caution. I answered his two basic questions: can I resign as director but remain a shareholder (yes) and would my liability still be limited (yes – to the cost of his share) but informed him of my limited knowledge in this area. I suggested that because of this, and the potential conflict of interest, he should consider seeking independent legal/accountancy advice. 

 

However, I did bring to his attention at least some of the points that he should clarify and consider before making a decision about resigning and (in words to this effect) that he needs to establish the best way to protect his financial investment in the company (whatever decision he makes) and fully understand what his rights would be as 50% shareholder.  I highlighted that one of the options he could consider would be to remain as director but with fewer responsibilities.  

 

Thank you again for your helpful responses – I appreciate all of you taking the time to write. I felt more confident in replying to him than I would have done had I tried to figure all this out by myself.

 

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