Ceasing to be a Director of Ltd – Indemnity and Director Loans

[johnny45]

Hi,

I am potentially looking to exit a business whereby I am an employee, director and minor shareholder.

Two Questions:

1. I have a director’s loan in terms of money I have put into the company as a loan that the company owes me. What happens to this outstanding balance and must it be re-paid back to me on demand or does it continue as a liability until insolvency or a date when the company has funds to pay it (if ever)?

2. Upon resignation as a director, do I need to consider any future risks, and get the company to indemnify against any future claims? i.e. if some work I did caused a problem 3 years later for whatever reason, and they claim it’s my fault, and try to claim back from me even though I am no longer a director.

I don’t believe there is any Directors Liability Insurance in place.

Thank you.

 

[Scalloway]

1. If there is no written agreement then it is up to the other directors what happens to it. Are you disposing of your shares? You could make agreement of a loan payment schedule a condition of sale.

 

[Mark T Jones]

As @Scalloway says, in the absence of written agreements it is for you to negotiate

You will remain legally liable for your work and actions whilst a directrr - but might be able to negotiate some kind of fall-back agreement.

You must be sure that your resignation is properly recorded and, if in any doubt, be sure to advise interested parties of your resignation.

 

[johnny45]

@Scalloway Having read my shareholder agreement it states:

1. The Loans shall become repayable on demand if an Insolvency Event occurs and is continuing - but obviously if this does occur, there wouldnt be any money to repay me anyway?

2. It states that my loan will be repaid pro rata as cashflow allows after some other loans the company has have been repaid - so I assume, being down the pecking order, if the company doesnt make enough money, I wont get that back. If it does make money in the future, I do get it back (unlikely).

I have an agreement that I have to give back shares at fair value price on director termination (offer first refusal to the majority stakeholder), but there not worth much and perhaps I could remain a small silent shareholder with no voting rights in case the company did take off in the future.


@Mark T Jones I will send recorded delivery letter to registered office address on companies house.

Is there not scope to indemnify me against any future claims/damages personally by the company in the future or if so, they pay my legal fees in any case? obviously not in regards to any matters regarding breaking the law.

Thank you both.

 

[Mark T Jones]

You and they can and should negotiate an exit agreement coving these important points

However an Agreement can't override your legal duties and responsibilities as a director

 

[Frank the Insurance guy]

Is there not scope to indemnify me against any future claims/damages personally by the company in the future or if so, they pay my legal fees in any case? obviously not in regards to any matters regarding breaking the law.

You are probably best seeking legal advice on this, but a couple of my thoughts:

1. Work carried out - the company is responsible for work you have carried out for the company's customers. The customers are unlikely to be able to pursue you directly as they contracted with the company. This does not prevent the company then pursuing you directly for any losses or damages paid to the customer, but this is likely to be only successful if they can demonstrate willful and deliberate wrongdoing!

2. Actions as a director - had you arranged a Directors Liability policy, this would generally cover claims against ex directors. However, you state that you have not got this cover in place. As a backstop, I would suggest you check the company's Article of Association - these usually state that the company will pay all legal and defence costs in relation to the actions of a director. But I am not sure whether this extends to include ex-directors.

 

[Scalloway]

1. The Loans shall become repayable on demand if an Insolvency Event occurs and is continuing - but obviously if this does occur, there wouldnt be any money to repay me anyway?

Probably not, but you would get the same percentage as the rest of the ordinary creditors.

2. It states that my loan will be repaid pro rata as cashflow allows after some other loans the company has have been repaid - so I assume, being down the pecking order, if the company doesnt make enough money, I wont get that back. If it does make money in the future, I do get it back (unlikely).

That will be up to the remaining directors but you are probably right.

I have an agreement that I have to give back shares at fair value price on director termination (offer first refusal to the majority stakeholder), but there not worth much and perhaps I could remain a small silent shareholder with no voting rights in case the company did take off in the future.

If you remain a shareholder they are less likely to forget about you.

 

[Mr D]

@Scalloway Having read my shareholder agreement it states:

1. The Loans shall become repayable on demand if an Insolvency Event occurs and is continuing - but obviously if this does occur, there wouldnt be any money to repay me anyway?

2. It states that my loan will be repaid pro rata as cashflow allows after some other loans the company has have been repaid - so I assume, being down the pecking order, if the company doesnt make enough money, I wont get that back. If it does make money in the future, I do get it back (unlikely).

I have an agreement that I have to give back shares at fair value price on director termination (offer first refusal to the majority stakeholder), but there not worth much and perhaps I could remain a small silent shareholder with no voting rights in case the company did take off in the future.


@Mark T Jones I will send recorded delivery letter to registered office address on companies house.

Is there not scope to indemnify me against any future claims/damages personally by the company in the future or if so, they pay my legal fees in any case? obviously not in regards to any matters regarding breaking the law.

Thank you both.

Perhaps wasn't the best shareholder agreement to agree to.

But that is what you have, expect it to be enforced.

Realistically for small companies the only people interested in buying the shares of someone wanting to get rid is going to be the other shareholders. Not worth much to anyone else.
You can keep shares for the rest of your life. Waiting for any dividends and maybe just causing a nuisance of yourself.
If you have a certain level of shares you can ask for an audit. Every year.
And they won't have the shares to vote it down.

 

[The Resolver]

What percentage of shares do you have? What dividends have been paid out in the past 2/3 years?

If they are not prepared to sign a release waiver and indemnity re: your actions in the past then,as Mr D says, you should be a right 'pita' until they realise they just might be better off buying your shares . If so, you must insist that the Sale and Purchase Agreement to cover that sale includes the waiver/indemnity (it is common to include them) .

Silly question but did you sign the Shareholders Agreement? ( worth checking as I often come across ones unsigned, particularly by those joining the company later.)

Was there no sperate loan agreement?

The repayment clause ("pro rata as cashflow allows ") seems a little vague . That might give you an opening to enforce repayment now. You are welcome to forward me a copy of the document ([email protected]) and then book yourself in for a free advice call with me (www.seeyououtofcourt.com/book-online) to discuss what I find,

 

[johnny45]

@The Resolver @Scalloway @Mr D + others - Sorry for the late reply and thank you for all your help.

Yes, there is a signed shareholder agreement. I own 35%. No dividends paid so far. Loan agreement is in shareholder agreement which just states that my loan is the lowest of priority against other loans the company has and will be repaid if the company has funds to do so after all the other loans have been repaid (which at this stage is probably unlikely unless the company is sold to another party who takes it on which could happen if there is the right buyer).

I have now resigned (as I have another new job to commit to) and sent the letter special delivery to the registered companies house ltd address and proof that the letter has been signed for (incidentally by the only other director). This now triggers that as a good leaver, I have to give the shares back, but at fair value (value is difficult but that's another matter, probably not worth a lot)

I put in my letter what my last day as a director and employee would be that the company agreed with and also waived my right to have additional holiday pay that may be outstanding as a payment (totally fine with this).

The only other director is now asking that I sign a further document stating that "I have no future claims against the company". Normally I would be happy with this, but with my outstanding loan/uncertainty, I am very uneasy to agree to this in case it comes back to haunt me and if any claim was needed, I would stand on nothing etc.

Would I be right in not signing this and can I be forced to sign this agreement?

Thank you.

 

[The Resolver]

35% is a significant minority since you can block any Special Resolution (eg to liquidate or change the Articles). Usually that would give you some extra negotiating power

Did your resignation letter clearly state you were resigning from the Board, ie as a Director, and not just as an employee ) ? If not you should make it clear you have not resigned from the Board as that wil be part of negotiation and then immediate;ly embark on gathering in as much financial data of the company as you can under your rights as a Director to help your negtiations over the sale price of your shares, Of course they can always vote you off the Board but that is going to take a further 28 days at the very least. In the iterim the company's accountant is professionally obliged to provide all financial information to you as Director.

If you did not resign clealrly as a Director, does the Sharehidlers Agreement, state that the forced share sale applies equally when just leaving emp,oyment?

Check the Shareholders Agreement to see if it states that a minority discount should not be applied to the value of your shares as, if it does, you want to check the valuer does not ignore such. It cna have a big impact on the value if applied.

Incidentally, and whilst I would need to see the SHA for the precise wording, you donlt have to 'hand back' the shares just offer to the other shareholders. If it does not include the company as a buyer on a buy back then that might give you some negotiating room sinec that method is often much more preferable to the remaining shareholders thanhaving to pay you themslves,

 

[CandC]

35% is a significant minority since you can block any Special Resolution (eg to liquidate or change the Articles). Usually that would give you some extra negotiating power

Did your resignation letter clearly state you were resigning from the Board, ie as a Director, and not just as an employee ) ? If not you should make it clear you have not resigned from the Board as that wil be part of negotiation and then immediate;ly embark on gathering in as much financial data of the company as you can under your rights as a Director to help your negtiations over the sale price of your shares, Of course they can always vote you off the Board but that is going to take a further 28 days at the very least. In the iterim the company's accountant is professionally obliged to provide all financial information to you as Director.

If you did not resign clealrly as a Director, does the Sharehidlers Agreement, state that the forced share sale applies equally when just leaving emp,oyment?

Check the Shareholders Agreement to see if it states that a minority discount should not be applied to the value of your shares as, if it does, you want to check the valuer does not ignore such. It cna have a big impact on the value if applied.

Incidentally, and whilst I would need to see the SHA for the precise wording, you donlt have to 'hand back' the shares just offer to the other shareholders. If it does not include the company as a buyer on a buy back then that might give you some negotiating room sinec that method is often much more preferable to the remaining shareholders thanhaving to pay you themslves,

If the SHA is silent on the matter, what are the responsibilities/duties on former directors to their former companies.
Would it be considered a breach of fiduciary duty if a director resigned and immediately began working as a director (or employee) of a competitor?

 

[The Resolver]

The first thing to do is to check if there is an Employment contract also in place which may contain a bar-out clause .

If not, then , even though there is no such clause in the Shareholders Agreement, Directors could be held in breach if they make use of confidential information of the first company for the benefit of the second company.

Thsi should be a separate thread