Defrauding startup shareholders? Limited company.

Chris Rain · Aug 27, 2022

I will keep this as brief as possible. I was a 49% shareholder in a start-up property letting business. I resigned as the other director of this limited company days before trading officially started. The reasons for this may be part of the legal process at a later date.

My question is this. Can the director of a limited company set up another company trading in exactly the same way but under a slightly different classification at Companies House using the same assets, in this case, at the very least, the same properties for rental? Without using the exact name of the business, an example of the name change for this new company could be as follows: The original company was called Phoenix Ltd, the new company is called Phoenix rentals Ltd. The name of the director whose behaviour I am questioning is spelt differently for the new company. Despite the other directors legal obligation I have never received a full set of accounts and the original company ABC Ltd appears to be in debt and ceased trading. The new company, using the same properties, and now more, is making a healthy profit. I have not posted this question for financial reasons although recompense for the considerable cost in investment of time and money, at the very least, would hopefully deter this person from behaving in a similar way in the future.

Thank you

The Byre · Aug 27, 2022

Chris Rain said:
Can the director of a limited company set up another company trading in exactly the same way but under a slightly different classification at Companies House using the same assets, in this case, at the very least, the same properties for rental?

Taking what you have written at face value - no, of course not!

But I suspect that there will be details that make the situation not that simple. For starters, the properties have to be in someone's name or in this case, in the name of a company that is the owner as registered on the deeds to that property. This really is one of those cases where the advice of a property lawyer who has been made aware of all details and contracts must be consulted.

Chris Rain · Aug 27, 2022

The Byre said:
Taking what you have written at face value - no, of course not!

But I suspect that there will be details that make the situation not that simple. For starters, the properties have to be in someone's name or in this case, in the name of a company that is the owner as registered on the deeds to that property. This really is one of those cases where the advice of a property lawyer who has been made aware of all details and contracts must be consulted.

The Byre, thank you for your reply. I'm sorry if I did not make myself clear. The properties are let on behalf of the owners and a management fee charged. ALL of the properties managed by the original company are now managed by the new company, using the same contractors. In effect it is the same business that I had a shareholding in but now with a VERY SLIGHTLY different name, a separate company with a sole director.

Thank you again

fisicx · Aug 27, 2022

This sort of thing happens all the time. It’s just about legal even if morally and ethically a bit iffy. If the property owners are all happy with the change to the new company there isn’t really much you can do about it. Are you a majority shareholder?

The Byre · Aug 27, 2022

My 30 cents worth is that trying to go after this person is probably to throw good money after bad money.

Company A had no assets and folded. Company B has assets in the form of new contracts with the property owners. It all depends on the scale of the company. If it is a thousand contracts or even a couple of hundred, that sounds as if it is a real thing. If it is just a handful, say, below ten, that does not sound like much meat-n-potatoes! i.e. not worth pursuing.

It really sounds as if you were passive in the running of Company A and this person then decided to fold it and open Company B. If it is a two-man company, then it would be reasonable for each director to do 50% of the work. If you failed in that duty, the behaviour of the other owner/director would be seen as reasonable. Obviously, I do not know if any of that is true - just a possibility!

Mark T Jones · Aug 27, 2022

Forget fraud - its a term that is freely bandied around but in reality is highly technical and difficult to prove.

It's likely that your co-shareholder has neglected their duties as a director- particularly the duty to act in the best interests of the company.

Ask yourself these questions:

- what outcome-specifically - are you looking for?

- how much time/effort/money are you prepared to invest in achieving it?

Chris Rain · Aug 27, 2022

Thank you both for your replies. Unfortunately, the workload was actually the reverse with me undertaking 90 % of the work. That is a far longer story with no legally accountable merit in such a small business which I won't go into here. That amongst behaviours I have fortunately not come across directly in my 40 successful years as a small business owner was why I had no choice but to resign, it would have been injurious to me to have remained.

Company A was successful but all resources were withdrawn in order to start Company B, essentially exactly the same business with an almost identical name. New contracts with the owners were signed under the banner of "re-branding". Company A, with my 49% shareholding then left with debt and no doubt put into liquidation shortly. This was done purely in order to exclude me from either recouping my original investment or benefit from any growth of Company A which no longer had property to let. The business makes a very handsome profit with nearly 30 holiday lets.

My aim is to hold the director to account, I am not the only person that has been adversely affected, and recoup my losses.

Hiw much am I prepared to spend in pursuit of this? Certainly equal to my original investment of time and money.

Chris Rain · Aug 27, 2022

fisicx said:
This sort of thing happens all the time. It’s just about legal even if morally and ethically a bit iffy. If the property owners are all happy with the change to the new company there isn’t really much you can do about it. Are you a majority shareholder?

Chris Rain · Aug 27, 2022

In reply to fisicx, 49% shareholder. There's the rub!

WaveJumper · Aug 27, 2022

Unfortunately this really is going to come down too how deep are your pockets and they are going to have to be deep. Not knowing the sums involved and full details your legals fees will soon swallow up any funds you maybe chasing.

I can imagine its a real bitter experience and wish you the best of luck

Mark T Jones · Aug 27, 2022

[QUOTE="Chris Rain, post:
My aim is to hold the director to account,
[/QUOTE]

I did say specifically for a reason.

Simplistically if its just revenge, you could focus on getting him banned from being a director

If its financial you will need to quantify and prove losses

The Resolver · Aug 28, 2022

What you describe is a clear breach of the statutory duties owed by your co-shareholder to the company (under s172 of the Companies Act 2006 -and s174 ) meaning that you can sue him in the name of the company for all the losses incurred by the first company (which should be close to the net profits of the secnd company).

From what you describe, your claim is so strong it is not likely to require court action. He would be crazy not to reach a resolution with you that should , if this is the outcome you prefer (undertandable given the loss of trust) involve a buyout of your interests.

For more details book yourself in with a free advice call here.

Gyumri · Aug 28, 2022

See also here: https://www.legislation.gov.uk/ukpga/2006/46/part/11

As the OP stated he did 90% of the work when he was a director but then jumped ship. If the new Co is doing well without him would a derivative claim brought by the OP really receive permission from the court? It appears that the claim wouldn't be for the benefit of the old Co if there was nobody available to run it properly. A judge may feel that the OP is really trying to benefit personally from the action.

Either way with solicitors' charges at £50O per hour - that's per hour not per day - any litigation is bound to end up as a very expensive pursuit.

fisicx · Aug 28, 2022

Gyumri said:
Either way with solicitors' charges at £50O per hour

Most solicitors don’t charge anywhere near that much.

Gyumri · Aug 28, 2022

Grade A £500 ph. Grade B £375. Take your pick. And they've just been reviewed as being too low!

https://www.judiciary.uk/wp-content/uploads/2021/01/20210108-GHR-Report-for-consultation-FINAL.pdf

Solicitors' guideline hourly rates

Guideline figures for carrying out a summary assessment of court costs, listed by pay band and grade for different parts of the country.

www.gov.uk

And those rates only apply for a summary assessment of costs for hearings lasting not more than a day.

The Resolver · Aug 29, 2022

Gyumri said:
See also here: https://www.legislation.gov.uk/ukpga/2006/46/part/11

As the OP stated he did 90% of the work when he was a director but then jumped ship. If the new Co is doing well without him would a derivative claim brought by the OP really receive permission from the court?

The claim has nothing to do with the OP personally. The claim is by Oldco , issued on its behalf by he OP as shareholder (assuming he still has his 49%) to recover the losses caused by the other shareholder as Director.

Gyumri · Aug 29, 2022

The Resolver said:
The claim is by Oldco , issued on its behalf by he OP as shareholder

You are quite correct, but isn't that the definition of a derivative claim?

Derivative litigation: recent High Court decision indicates continued significance of the common law derivative action | Insights | Mayer Brown

Related People: Freddie Calder, Trainee Solicitor As COVID-19 continues to have far reaching implications for businesses – and their

www.mayerbrown.com

kulture · Aug 29, 2022

Gyumri said:
Grade A £500 ph. Grade B £375. Take your pick. And they've just been reviewed as being too low!

https://www.judiciary.uk/wp-content/uploads/2021/01/20210108-GHR-Report-for-consultation-FINAL.pdf

See also

Solicitors' guideline hourly rates

Guideline figures for carrying out a summary assessment of court costs, listed by pay band and grade for different parts of the country.

www.gov.uk

And those rates only apply for a summary assessment of costs for hearings lasting not more than a day.

Do you actually read the links you so obviously Google? The over £500 rate is for over 8 years experience and central London only. Everywhere else is in the order of £260 or less.

Gyumri · Aug 29, 2022

£260 per hour? The Royal College of Nursing states that the average weekly pay for an NHS Nurse is £642 - so it's still going to cost the OP an arm and a leg to pursue litigation.

kulture · Aug 29, 2022

Gyumri said:
£260 per hour? The Royal College of Nursing states that the average weekly pay for an NHS Nurse is £642 - so it's still going to cost the OP an arm and a leg to pursue litigation.

Nobody said that it would be cheap, its just that the £500+ per hour figure you keep quoting is excessive. Further the cost is likely to fall on the COMPANY not an individual, and as the Resolver said, it is likely that it would be settled before it gets to court.

Or are you suggesting that the OP just gives up and losses out?

Gyumri · Aug 30, 2022

Chris Rain said:
I resigned as the other director of this limited company days before trading officially started.

Chris Rain said:
The workload was actually the reverse with me undertaking 90 % of the work.

It's not clear whether the other director did anything wrong in starting a new business if the OP resigned as a director even before the company traded. Who then was supposed to run the company if the OP did 90% of the work but then jumped ship?

We don't know the full story to say whether the other director has done anything wrong in going it alone as another company under his own steam.

So it's not cut and dry that the OP would get the courts permission to bring a derivative claim simply because the other director has effectively also resigned.

kulture · Aug 30, 2022

Gyumri said:
It's not clear whether the other director did anything wrong in starting a new business if the OP resigned as a director even before the company traded. Who then was supposed to run the company if the OP did 90% of the work but then jumped ship?

We don't know the full story to say whether the other director has done anything wrong in going it alone as another company under his own steam.

So it's not cut and dry that the OP would get the courts permission to bring a derivative claim simply because the other director has effectively also resigned.

Of course details matter, so does actually reading the original post. The OP is a 49% shareholder of a company. The director of the company has set up a new company and moved all the business to this new company. It is absolutely immaterial whether the OP worked or not. From what has been said the director has not acted in the best interest of the company.

IanSuth · Aug 30, 2022

If i was you I would quickly look at the original contracts the holiday let owners signed - if you are lucky they contain a clause about exclusivity and not being able to move to another managing agent without recompense - you could use that as a lever in getting money back to OldCo from NewCo

The Resolver · Aug 30, 2022

IanSuth said:
If i was you I would quickly look at the original contracts the holiday let owners signed - if you are lucky they contain a clause about exclusivity and not being able to move to another managing agent without recompense - you could use that as a lever in getting money back to OldCo from NewCo

Useful point! But that action could only be taken by the Director in the name of the company for breach of contract not the OP. This is a claim against a third party by the company so could not be undertaken by the OP by way of a derivative action. However, if the Director refused to puruse the owners for breach that would be additional evidence of breach if his duties to protect the company. (inlcuding conflict fo interest)

The Resolver · Aug 30, 2022

Gyumri said:
So it's not cut and dry that the OP would get the courts permission to bring a derivative claim simply because the other director has effectively also resigned.

It IS cut and dried.!

2020Lawyer2020 · Aug 30, 2022

It certainly is a clear case. Also taking customers/a database can breach intellectual property rights (eg database right in a list of names that may well belong to the original company) and breach of confidentiality. Some of the names will be living individuals and there is probably no lawful basis under data protection law for the director to have passed those names to his new company either.

Gyumri · Aug 30, 2022

I beg to differ when we haven't heard the whole story. There's always two sides to a story. To draw a conclusion solely from what the OP is saying is ok if one has had a few drinks, but not if one is trying to consider the OP's position impartially.

Gyumri · Aug 30, 2022

kulture said:
Of course details matter, so does actually reading the original post. The OP is a 49% shareholder of a company. The director of the company has set up a new company and moved all the business to this new company. It is absolutely immaterial whether the OP worked or not. From what has been said the director has not acted in the best interest of the company.

Without the OP doing "90%" of the work there is no company! Who is obliged to run it? Father Christmas? The OP resigned even before the company started to trade.

If you had an investor who agreed to serve as a director to do 90% of the work but then jumped ship before it has even started to trade what would you do?

I think you would do exactly what the OP is complaining about: you would go it alone.

We don't know the full picture and the OP should be cautious about trying to spend money launching a derivative claim.

kulture · Aug 30, 2022

Gyumri said:
Without the OP doing "90%" of the work there is no company! Who is obliged to run it? Father Christmas? The OP resigned even before the company started to trade.

If you had an investor who agreed to serve as a director to do 90% of the work but then jumped ship before it has even started to trade what would you do?

I think you would do exactly what the OP is complaining about: you would go it alone.

We don't know the full picture and the OP should be cautious about trying to spend money launching a derivative claim.

You are demonstrating a lack of knowledge of the law. A director has a duty to run a company in the best interests of the shareholders. It matters not one bit if the shareholders don’t do any work. The shareholders have no obligation to do ANYTHING. So to transfer the business away is on the face of it not in the interests of the shareholders.

Of course details matter, and there is always another side to any story, but the law is not interested in fairness.

Gyumri · Aug 30, 2022

You are quite right except It could be said that the OP is equally to blame for jumping ship. If he can do so why not the other director.

kulture · Aug 31, 2022

Gyumri said:
You are quite right except It could be said that the OP is equally to blame for jumping ship. If he can do so why not the other director.

This is a common misconception “equally to blame “ . The law has no concept for this. All too often we see the complaint coming from the other side. The person who worked hard setting up the business and getting all the revenue complaining that the 49% shareholder gets half the profits. But that is how limited companies work. Anyone in this position has to either buy out the original shareholder, or not take profits as dividend but as a salary (within reason).

Setting up a second company and moving the business across is not a legal solution to this. No matter how unfair this is.

Gyumri · Aug 31, 2022

kulture said:
Setting up a second company and moving the business across is not a legal solution to this.

You are quite right as that would definitely harm any company and undermine the work of the remaining director who perhaps started the company. In this case however there is no remaining director as the OP resigned before it even started to trade.

We don't know the full picture but I see nothing wrong as to why the other director should then be expected to remain at the helm while the other director jumps ship. Starting a new company in competition might be actionable but we've only heard the OP's position. It's easy to point the finger of blame without knowing the whole story.

kulture · Aug 31, 2022

Gyumri said:
You are quite right as that would definitely harm any company and undermine the work of the remaining director who perhaps started the company. In this case however there is no remaining director as the OP resigned before it even started to trade.

We don't know the full picture but I see nothing wrong as to why the other director should then be expected to remain at the helm while the other director jumps ship. Starting a new company in competition might be actionable but we've only heard the OP's position. It's easy to point the finger of blame without knowing the whole story.

Again, you have failed to read the original post. The OP resigned as the "other director " clearly indicating that there was a remaining director. Now the shareholdres have a duty to ensure that there is at least one director. In this case there clearly was. What this highlights is the NEED to have a good shareholder agreement so that if one person runs off, they are obliged to sell their shares. As the company was it its start up phase this would have been at little or no cost. The danger that this case highlights is the all too often trap of the remainin sharerholder doing all the work building up the company and then realising that half the profits belong to the guy who has done nothing. The attempt to syphon off the business into another company, whilst understandable, is illegal.

The Byre · Aug 31, 2022

kulture said:
the law is not interested in fairness.

kulture said:
Setting up a second company and moving the business across is not a legal solution to this. No matter how unfair this is.

All this talk of fairness had me scurrying to the bookshelves to see what John MacKenzie said in his key work A Manual of Ethics on the subject of fairness - and the answer is nothing. Not a sausage, not even any mention of any synonyms for the word such as equity.

So I went grubbing through Allen's Law in the Making - and indeed there is a whole chapter on equity. But that is equity before the law, not equity for its own sake. He concludes "English equity has developed a rigour and artificiality of its own which have sometimes resulted in the denial rather than the furtherance of natural justice."

In almost all jurisdictions, equity as a concept exists and is even regarded to be a branch of law as in the French and German systems. But this is equity before the law, never equity in life. The key expression being "Audi alteram partem." - let the other side be heard. Wikipedia has a good summation of the whole subject of 'Natural Justice'. https://en.wikipedia.org/wiki/Natural_justice

In other words, the parties involved should be treated equally, but they are perfectly at liberty to place themselves in inequitable positions, such as signing inequitable contracts unread or being otherwise ignorant of the consequences of their actions.

As for the OP and his woes, we do not know the details of the case and therefore specific comment is totally superfluous.

Gyumri · Sep 3, 2022

Chris Rain said:
My question is this. Can the director of a limited company set up another company trading in exactly the same way

See this argument between Mr Taylor and Mr Goodchild and then decide which option to pursue.

Whose claim is it anyway? Henderson abuse, unfair prejudice petitions and claims accruing to a company

Is it a Henderson abuse of process for a Company to brings proceedings against a former Director?

gatehouselaw.co.uk

The Resolver · Sep 3, 2022

Gyumri said:
See this argument between Mr Taylor and Mr Goodchild and then decide which option to pursue.

Whose claim is it anyway? Henderson abuse, unfair prejudice petitions and claims accruing to a company

Is it a Henderson abuse of process for a Company to brings proceedings against a former Director?

gatehouselaw.co.uk

Chris would be wasting his time reading that case Report. This case has nothing to do with Chris's question,. Given that he was still a Director of the first company when he set up a competing company, there was no argument but that it was wrong, As the judge said "Mr Taylor’s actions were “the clearest possible breach of directors’ fiduciary and statutory duties.” The remaining shareholder Director won hands down That decision was not in dispute in the subsequent case covered by this Law Report.

This later case was not whether it was wrong for the Director to set up the competing company, but was on a technical point of legal process as to whether the claim for anoutstanding loan and Work In Progress on files taken away could proceed a few years later after the case for breach of Director's duty had been issued without the loan/WIP claim and won by the Director of the first company. He lost as the court decided, on a point of general principle (and following the 'Henderson' rule) , he should have included those claims in the previousl case,

Gyumri · Sep 3, 2022

The Resolver said:
This later case was not whether it was wrong for the Director to set up the competing company,

Correct. But it is the original case that should be of interest to the OP in making a decision about pursuing his former Co-director who ran off with the assets of his company that he had started or invested in. It's a similar situation.

The original judgment might be worth reading.

The Resolver · Sep 4, 2022

Gyumri said:
Correct. But it is the original case that should be of interest to the OP in making a decision about pursuing his former Co-director who ran off with the assets of his company that he had started or invested in. It's a similar situatuation.

Then why suggest the OP reads the later decision on a differeent topic i.e. whether you can bring a second claim that could have been added to the original claim. ,

If people want to read the original judgment just on breach of duty by a Director, which was won hands down against the director in breach, it is at https://www.bailii.org/ew/cases/EWHC/Ch/2018/2946.html

Gyumri · Sep 4, 2022

I can't spoon feed the OP. He wanted to know what his Options were and I've given them to him from the horses mouth which is the court.

It looks to me like he could bring a derivative claim with the permission of the court. This is not an area of the law that I have a great interest in but at least the OP will understand his position a bit more than when he first posted on the forum.

The Resolver · Sep 4, 2022

Gyumri said:
I can't spoon feed the OP. He wanted to know what his Options were and I've given them to him from the horses mouth which is the court.

It looks to me like he could bring a derivative claim with the permission of the court. This is not an area of the law that I have a great interest in but at least the OP will understand his position a bit more than when he first posted on the forum.

The appeal judgment you linked to does not in any sense explain or set out the OP's options or even relate to them. As I said it was on a totally different, and somehwat unusual , issue (whether having successfully sued he could start a second action to claim monies he overlooked claiming for in the first case.) and not about whether or not the other Director had breached his duty. As I said the court of first instance decided overwhelming in the Claimant;s favour.

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