Director disputes – when one wants to liquidate and one doesn’t – what next?

Solving director disputes: Liquidation

When 50/50 directors disagree on liquidating their company, one party might need to think about purchasing the other partner’s share in the business. Alternatively, they could apply for special reasons to wind up the company.

 

How to resolve director disputes when a company is insolvent?

When collaborating closely with another person, especially in a shared business, disagreements are bound to arise occasionally. It’s a natural part of working together, and in most instances, these disagreements are swiftly resolved and have no lasting impact.

Yet, in certain cases, conflicts among company directors or business partners can escalate, posing a threat to long-term business prosperity. When such disputes push the company toward insolvency, swift action becomes imperative.

But with only two directors, each holding a 50/50 share in the company, how can the situation be resolved?

Mediation for dispute resolution can be beneficial; engaging experienced business advisors to negotiate a path forward can safeguard the company’s value and enable ongoing trade.

In the end, though, the solution might entail removing a director from the limited company or proceeding with liquidation to close the company with outstanding debts.

 

Resolving a deadlocked dispute

When two directors each have an equal stake in a business and clash over a strategic decision, or if they believe the partnership has no future, possibly due to an impending divorce, it leads to a ‘deadlock.‘ 

With no other board members to break the tie, a stalemate arises.

This situation can be catastrophic, even for a business that has enjoyed some success in the past. Attention is diverted from the day-to-day operation, and efforts are redirected toward resolving these significant issues.

If both parties remain firm in their views and refuse to compromise or yield to the other’s opinion, operations can come to a halt, and the quality of output may suffer, jeopardising the entire future of the business.

What options are available if one director wants to initiate voluntary liquidation and move forward, while the other prefers to continue?

 

What if when one director wants to liquidate and the other one does not? 

We frequently encounter situations where one director has reached their limit and wishes to depart from the business, while the other director is eager to sustain operations. In theory, the departing director can resign, leaving the remaining director in charge. However, in practice, it’s seldom as straightforward as that.

The departing director often hesitates to relinquish full control to the remaining director and would rather see the company completely shut down, ensuring that all outstanding liabilities are settled.

 

Removing a director from a limited company: purchasing the partner’s shares

If the shareholders are going through divorce proceedings, the court might arrange for a limited company divorce settlement, wherein the remaining director purchases the shares of the other shareholder. 

If finances permit, this action would eliminate them as a company director and allow the business to proceed under sole directorship.

Some disputes arise from directors falling out due to communication breakdowns or significant differences in viewpoints, rather than solely from a marriage ending.

Under such circumstances, a just and equitable winding-up may be equally effective, enabling shareholders to move forward, although the next steps will be determined by the courts.

 

Unlocking special grounds for winding up a company

In this scenario, the shareholder wishing to leave the business can petition for a ‘just and equitable winding-up. This enables the court to determine whether liquidating the business is the best solution for resolving the deadlock.

The court will assess whether there are any alternative solutions that could enable the business to continue trading while also resolving the deadlock, such as through a sale of shares, before approving the winding-up of the company.

If alternatives aren’t viable and a petition is filed, provided the company is solvent, it will undergo a Members’ Voluntary Liquidation (MVL) process. This involves selling all business assets, distributing the proceeds among shareholders, and closing down the company.

While not ideal for the party wishing to continue with the company, they may have the opportunity to begin anew with a new business, leveraging existing contracts or customer relationships.

 

What would your duty as company director? 

If left unaddressed, director disputes can exert significant pressure on a business and its finances, sometimes resulting in the company becoming insolvent.

When a company becomes insolvent, directors have specific duties and obligations. One of these is to prioritise the interests of creditors over those of directors and shareholders. 

Hence, despite ongoing disputes among directors, these conflicts must be set aside while the company’s issues are addressed.

This isn’t merely advisable; it’s a legal requirement. Neglecting to prioritise creditors or engaging in actions that might exacerbate their position—such as continuing to trade and accumulating more debt—could prompt investigations into wrongful trading. Directors could face disqualification from acting as a director for up to 15 years as a consequence

 

What can I do if I am in this position?

If you find yourself in this situation, whether you’re the one aiming to keep the company operational or the one leaning towards closure, it’s crucial to bear in mind your responsibilities and obligations as a company director.

Doing nothing is not a viable option. Without intervention, the situation is likely to deteriorate unless all parties can come to a mutually acceptable decision regarding the company’s future.

If your business is struggling, it’s essential to set aside your differences and prioritise your company and its creditors. 

 

Read More: 

• How to liquidate a company when in a franchise
• What happens to employees during liquidation and other insolvency processes
• Intellectual property and liquidation
• LLP Liquidation
• The Difference Between Liquidation and Administration

 

How Vanguard Insolvency can help

Addressing shareholder/director disputes is a nuanced aspect of business, and seeking professional guidance on the optimal course of action is crucial. 

Our specialists at Vanguard Insolvency offer the necessary advice, leveraging sound commercial expertise and extensive experience. Contact us today to schedule a complimentary same-day consultation at any of our 100+ offices.