Feuding directors

Feuding directors

Didn't find your answer?

I have been asked to give advice to an old friend of a very good client that has a problem. He is a 50% shareholder and director (A) of a company, the other 50% shareholder and director (B) has been ill for some time and is unable to work, although he has still been taking full salary & dividends. A & B have now fallen out over a number of matters which I won't go into. B has now asked A to buy him out and after many months they have agreed on a price of £80k. The deal has not been completed yet as they cannot agree on how the £80k will be treated. B wants the £80k to be just for the shares, A (as suggested by the solicitor) wants the £80k to be made up up of shares, redundancy payment and written off loan (B has just taken £40k from the business without telling anyone). It doesn't look like they will ever come to an agreement as B is refusing anything other than 80k for the shares as advised by their current accountant. Which leads to the other problem, the current accountant is a very old friend of B and he is very clearly only acting in his favour. A has confirmed that once B is out of the company, he will leave the accountant and come across to me.

A does not see this ever being resolved, so he was wondering if he could...

1. Leave the other accountant and come across to me now (but B will not agree to this)..

2. Just liquidate the company and start again (but B will not agree to this)..

3. Find a way to have B removed as a director as he is not able to work (the solicitor thinks there is something in the mem & arts that may let them do this), then appoint me as accountant, liquidate and start again (without B).

The solicitor is costing A lots of money and he needs a resolution asap..

Any ideas?

Replies (18)

Please login or register to join the discussion.

Locutus of Borg
By Locutus
28th Aug 2014 18:24

Don't get involved

It's all too complicated.  If A and B can't sort it out between themselves then another party (i.e. you) will just complicate things further and you won't get paid for it.  It is essentially a legal dispute, so you can't help much.

If solicitors' fees bankrupt the company, then so be it.  A and B just have to learn to come to some accommodation with each other.

Thanks (0)
avatar
By ptax
28th Aug 2014 18:32

Thanks Locutus. The problem is that B is refusing to get any legal advice and their accountant (who is advising B) will not budge.

A just wants to start a new company and let the old one fade away, but he has been advised not to do so by the solicitor as he could get sued by B for taking the clients.

It's a mess that I don't need, but I am promised a new client when it does get resolved (if ever)!

 

Thanks (0)
Replying to atleastisoundknowledgable...:
avatar
By thomas34
29th Aug 2014 10:32

Change of Tack

ptax wrote:

.

A just wants to start a new company and let the old one fade away, but he has been advised not to do so by the solicitor as he could get sued by B for taking the clients.

 

 

I've never been convinced that solicitors can do a better job than an experienced accountant in these cases.

How the hell did B manage to extract £40K from the company and what is to stop him doing it again? There should have been a limit set at the bank where both signatures were required for sums over a certain amount (unless of course this is a multi-million pound company where £40K is genuinely a small amount).

I don't believe that forming a new company is a problem and A should certainly do this now to protect his future income stream. If a settlement is reached the company can be wound up in an orderly fashion. The clients will have a choice as to which company they wish to do business with but it seems B is in a weak position if he is contributing nothing to the current business. 

It seems B is happy for A to rack up ever increasing legal fees whilst seeing the tax benefit of redundancy (a risky strategy) and 10% on the rest. I presume that there are no contracts of service in place which might make the advice different?

 

 

 

Thanks (0)
avatar
By WhichTyler
28th Aug 2014 18:38

They haven';t agreed the price...

If B wants £80k cash and his 'loan' waived, he wants £120k. They need to bridge that gap before going much further.

Thanks (0)
David Winch
By David Winch
28th Aug 2014 18:42

What are the pros & cons?

What are the pros & cons of each proposal for A and B?

Presumably if there is some form of 'redundancy' payment the intention would be that that would be an allowable expense for the company?  Also would it involve less tax for B on the 'package' as a whole?

Presumably even if B were to 'get' £80k for the shares he would then have to repay his overdrawn current account balance (so would be paid only £40k)?

David

Thanks (1)
avatar
By ptax
28th Aug 2014 19:15

WhichTyler, sorry I didn't make it clear. B wants £80k, but he has already taken £40k so A wants to treat the £40k already taken as a directors loan and write it off, then A just needs to pay another £40k. The company will just need to pay employers NIC on the written off loan and B will have to pay his tax on the loan.

davidwinch - the solicitor wanted to treat £30k of the £80k as redundancy so the company can claim the expense, but their accountant won't agree to this as he thinks that directors cannot receive a redundancy payment, he thinks it may be queried by HMRC. He just wants to treat the sale as £80k for shares, £40k of which he has already taken and another £40k that A will have to come up with himself. The solicitor is not happy with this as technically the £40k already taken will then be regarded a A's income (which he paid to B for he shares) and he will have to pay tax on this.

 

Thanks (0)
avatar
By User deleted
28th Aug 2014 20:49

To the OP

Whilst this structure is the most disastrous one that a company can ever get (very common with small businesses though!) A actually hasn't got much room for negotiation:

1. To remove B, A should be able to pass an ordinary resolution (s.168, CA/06) which is not possible unless he has 50.1% ownership. This is despite whatever the Memo and Articles says because M&A cannot override the CA/06.

2. That brings the whole thing down to negotiation. A's solicitor could negotiate on the following basis:

a) financial - this is best left to A&B and their accountants. However, if the business is worth it a bit of give and take is advisable.

b) the fact that B is unable to effectively perform the duties of a director particularly s.172 et seq. So he should resign.

 

Thanks (0)
Replying to beck1747:
avatar
By ptax
28th Aug 2014 21:16

Thanks taxguru, yes I know a 50/50 split is a pain when shareholders/directors fall out. I had thought about the ordinary resolution, but this is obviously not an option.

The fact that A&B's accountant is the same guy and he only has B's interests in mind (they went to school together) makes it harder. He clearly doesn't care about any possible tax implications for A and I think he is resigned to the fact that he is going to lose A and the company as clients when everything is sorted and the more this drags on the more fees he is going to get out of the company.

The solicitor thought that they saw something in the mem & arts that would enable them to remove him as director, but I didn't know about the M&A not being able to override CA/06, so I will let them know.

I will look into s.172 as he obviously is not fit to perform his duties. 

Many thanks!

 

 

Thanks (0)
avatar
By Jekyll and Hyde
28th Aug 2014 21:46

who is the solicitor acting for?
You indicate that the accountant maybe biased, however if I were in B's position I would wish to have a CGT charge of 10% on £70K with very little risk for B moving forward with his tax affairs. My question is what is the value placed on the company? And does this justify the £80k for 50% holding.

Feom B's perspective Redundancy pay could challenged by HMRC leaving him with a potential PAYE liability and penalties. Best case 20% tax and worst case HRT The loan write off would be again subject to income tax and depending on his other income subject to HRT. So looking at advising B why would you not recomend CGT route?

So if you were advising the company would you consider a loan write off or would you advise for the company to seek repayment of the loan and potentially charge interest? Would you advise redundant pay and reduce the reserves? My guess is no.

Which leaves me thinking you and the solicitor are advising A foremost and have as much of a potential conflict as the current accountant as you are looking at maximising the overall tax position of A after B has left. That is I consider the worst position is for A to purchase the shares of B.

My thoughts therefore lie on the thoughts that if the valuation of the shared are such that £80k represents a 50% holding, then A may have to look at increasing the offer to B in order to restructure B exit from the company. Afterall, upon reading OP post £80k was agreed to but B out, and I naturally read this as a sale of shares.

Thanks (0)
avatar
By bernard michael
29th Aug 2014 09:17

Why not discuss with the solicitors about applying to the Courts for the company to be wound up under S 81.(1) (D) Companies Act 2008.

The broad terms of which apply to your client with the exception of  (ii),

Perhaps David could comment on this approach

“(i) the directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and –

(aa)      irreparable injury to the company is resulting, or may result, from the deadlock: or

(bb)      the company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock;

(ii)  the shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms have expired; or

(iii) it is otherwise just and equitable for the company to be wound up”.

 

 

Thanks (0)
Replying to Glennzy:
avatar
By User deleted
29th Aug 2014 10:42

SA Companies Act

bernard michael wrote:

Why not discuss with the solicitors about applying to the Courts for the company to be wound up under S 81.(1) (D) Companies Act 2008.

The broad terms of which apply to your client with the exception of  (ii),

Perhaps David could comment on this approach

“(i) the directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and –

(aa)      irreparable injury to the company is resulting, or may result, from the deadlock: or

(bb)      the company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock;

(ii)  the shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms have expired; or

(iii) it is otherwise just and equitable for the company to be wound up”.

 

 

SA companies Act has got nothing to do with UK compaines

Thanks (0)
David Winch
By David Winch
29th Aug 2014 10:24

No comment

Bernard

I am not going to comment on the 'just & equitable' winding up possibilities.  There are others on here with more relevant knowledge & experience.

David

Thanks (0)
avatar
By bernard michael
29th Aug 2014 10:33

Don't blame you

I've been involved in one for a client and it wasn't easy as both sides went to war,the legal costs were ridiculous and the judge very sarcastic in his judgement. Possibly a letter from a solicitor might bang heads together

Thanks (0)
avatar
By ptax
29th Aug 2014 10:40

Thanks Jekyll & Hyde & bernard michael

Yes, we understand that from B's point of view he would rather be taxed at 10% on just a share sale. But the solicitors are insisting that a small amount must be for redundancy and they are trying to restrict A's tax liabilities by stating that the £40k already taken (without permission) be regarded as a loan write off as B should only pay tax at 10% (director & participator) and the company will only be liable for the Er's NIC (tax deductible).

The valuation by the accountant was based on the maximum amount that A could afford to pay (they initially asked for £500k!).

We understand that a redundancy payment could be questioned by HMRC, so they want to keep the redundancy payment very small.

The valuation is a matter of dispute as the company has had a few very bad years and it is not looking very good going forward. I suggested to A that he get an independent valuation by a professional valuer, when he mentioned this to the accountant they were not happy, but it did make them bring the valuation down to the £80k.

The solicitor is talking about 'other options', I have briefly discussed with them the possibility of removing B as a director or getting the company wound up, but they are not keen on these options as they expect that B will sue them.

Thanks for all your advice!

 

 

Thanks (0)
Replying to Duggimon:
avatar
By User deleted
29th Aug 2014 11:20

Maximum?...

ptax wrote:

The valuation by the accountant was based on the maximum amount that A could afford to pay (they initially asked for £500k!).

On the back of that it sounds as though a members liquidation may be the better course of action for B, value-wise.

Thanks (0)
avatar
By bernard michael
29th Aug 2014 10:54

You're right sorry should be Companies Act 2006 s 994

Thanks (0)
avatar
By ptax
29th Aug 2014 10:59

Money removed from company

thomas34 - I am not sure how B managed to get £40k out of the bank, but I think that A has now managed to cancel B's debit cards.

I have set up a new company for A just in case he needs it in a hurry, but he has been advised strongly by the solicitor to not use it as they expect he will be sued by B.

There are no contracts in place, which disappointed the solicitors. In the 20yrs I have been in accounts I have only known a handful of companies that have had directors agreements!

Thanks (0)
Replying to Wilson Philips:
avatar
By User deleted
29th Aug 2014 11:19

£40k theft

ptax wrote:

thomas34 - I am not sure how B managed to get £40k out of the bank, but I think that A has now managed to cancel B's debit cards.

I

 

In that case try him for theft - the money belongs to the company and if there are two directors both the directors will need to agree (unless proved otherwise based on Articles, past practice etc) before company's property could be appropriated.

Thanks (0)