I'll try to keep it brief. Client runs a successful business as sole director / shareholder. Her partner of 8 years was out of work and they decided to set up company B together, joint directors and 50/50 shareholders. The idea behind this was that the client would provide initial start up funds, down payment on a shop lease, minor alterations etc. then her partner would set up shop (call it a barbers shop) while the client would potentially offer complementary beauty treatments (I have subtly changed their 'trades' for the purpose of posting this).
Client deposited 10k from her (in credit) loan account with her existing company, into the newco bank, as a loan to newco.
It later transpires that the relationship had been 'on-off' for a while and her partner at this point ended the relationship.
The funds in newco have been spent on alterations / rent etc and the shop is now open.
Client's ex partner is now unhappy that client has access to the company bank account and is adamant he wants her to resign as director and 'come off the bank account'. I suggested to the client that perhaps an agreement could be made so that when the loan is repaid, at that point she will remove herself from the company, however the ex is not happy with this.
Client is emotional and is hoping he will come back to her, so in that hope, she doesn't want to involve lawyers and is ready to walk away from the company, which I think is a mistake.
I have of course advised she contact a solicitor but to no avail. She has children to her ex and he apparently didn't pay towards their upkeep, so the chances of the loan ever being repaid are slim.
No written loan agreement exists.
Am I right to advise caution in resigning as director at this stage and selling back her shares?
I think she is being ruled by her heart as opposed to her head and I do have sympathy for her.
Ordinarily she is a head strong, very successful businesswoman, but this seems to have has knocked her off par.
I don't think there is an easy answer here and am just opening this up for opinion.
Thanks in advance
Replies (22)
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Oh dear, he sounds a right catch.
I would just advise her of the implications of her resigning as a Director, transferring shares etc as you would any other client and ensure it is in writing.
Other than that don’t get involved, if you act for Company B and are conflicted then resign. Ensure you do not give legal advice etc and leave them to it other than to act on their instructions.
End of the day, it's her £10,000.
But I think she needs to hang on to whatever control she has of the new company until the loan is repaid or the future of her personal life is clearer.
If she's clinging to hopes of a reconciliation, surely the wise course of action is to retain any leverage she has rather than toss it away.
I think you should be ready with practical advice when the client wants it. This is largely a personal and highly emotional issue and, as such, not a lot to do with you.
I think you've advised correctly if she resigns now she might regret it later when she is thinking straight. Put your advice in writing, keep it factual and let her take legal advice on recovering the 10k or decide herself. I would make sure that she isn't personally liable or as a director for any of the leases etc. If the other director walks away in a huff it could cost her more than the 10k.
She needs to retain a bit of control so should stay as a Director and get legal advice asap.
She needs to retain a bit of control so should stay as a Director and get legal advice asap.
Why does she 'need to maintain control'?
She's an ex. She is a shareholder and has a loan outstanding (anywhere between 50% and 100% of the £10k invested) but it sounds like it's his business really and if we were advising him we would be telling him not to let the (now) ex wife/girlfriend/whatever unduly control the business whilst also reminding him of his obligations to ensure that she gets her pro-rata share of any dividends or capital upon winding up.
As a joint shareholder she may well have the power to vote but in all honesty when one party tries to keep an unnecessary hold over the other (particularly if she is highly emotional as suggested) it can only lead to further conflict. Her best chance of getting her cash back, and remaining on good terms, is to keep him on side. If she engages a solicitor over such an amount then both sides' fees will quickly eclipse the sum involved. Of course, she may well require a solicitor anyway for family and financial matters generally, we don't know how intertwined their assets and liabilities are.
When acting for divorcing clients it is important to separate sympathy for their situation *as it has been described to you* from professional advice. Remember that there are normally three sides to every story (hers, his, and the truth) and avoid stoking the emotional flames.
You're the ex, aren't you?
Haha caught red handed. The OP called me a barber with a beautician wife but it's really an accountancy practice and she does bookkeeping (or maybe the other way round).
Seriously though, professional impartiality is important and might be lacking in some quarters, judging by some of the posts on this thread (what a catch, she needs to retain control, etc) which are entirely based on an unknown person's second hand account of this bloke's (or woman's - it might not just be the occupations the OP changed, they might have reversed the sexes or even changed it from same-sex, to throw us off) actions.
Seriously though, professional impartiality is important and might be lacking in some quarters, judging by some of the posts on this thread (what a catch, she needs to retain control, etc) which are entirely based on an unknown person's second hand account of this bloke's (or woman's - it might not just be the occupations the OP changed, they might have reversed the sexes or even changed it from same-sex, to throw us off) actions.
Well, I think you make assumptions there.
I was looking at it from the point of view of getting her £10000 back.
Not strictly related, but I'd also recommend caution as to engagement letters and fee agreements, as I've had a marital breakup situation like this where the emotional spouse ran up serious time with multiple calls etc, and the other half refused to pay. However both were involved with the company...
Be careful also to ensure that personal advice doesn't conflict with your engagement. I eventually refused to deal with the wife and advised her to get her own advisor, as it was a conflict of interest to advise her, the company and the husband!
As others have said, stick to the facts and be sure who you're acting for.
The "wife" is your client so you should advise on what is in her best interests. The state of her relationship (or ex relationship) is not your concern other than the fact that it is impacting on her finances.
She should retain any control she has until her £10k plus any interest is repaid.
Reading between the lines I get the impression that she will be lucky to see a penny if she allows him full control of the business.
What if it would be in her best interest simply to walk away from the ex and the cash? Life is about more than money.
One problem that frequently happens when couples split up is that one or both ex partners find it important to get the world to accept that their ex is the spawn of satan. They then spend time lobbying people to persuade them that this is the case. Those facts that may exist are then hammered into a shape that may fit this thesis. In this case the shared children are more important than any row about 10k. The children would probably most want that their parents don't row with each other. Hence beyond giving any technical advice it is best to stay out of this.
I can't see any reason why she shouldn't resign as a Director, especially if she isn't involved in the running of the Company.
She remains a shareholder and presumably the loan is documented? As a shareholder she has the right to see the full accounts when they're due.