Complicated issue involving directors who are also shareholders

[IDoIT]

Our growing and semi successful IT consultancy is going through a difficult situation.

In brief:
-- 4 contracting consultants came together to pool funds for the purpose of building a consultancy

- during this time the ltd company billed clients, while contracts were in name of director directly.

- during this time a sales function was set up using pooled funds

- that person comes with substantial experience and has proven to be a valuable asset to the business

- however they've clashed heads with the more junior directors (in terms of experience), where the egos of the directors have been knocked because they don't know what they're doing.

- the business has £10k in the bank, £40k of receivables, and a monthly outflow of £37k.

- the collective pooled funds equated to circa £50k pm

- we have one deal in live cycle worth circa £100k on the table with potential for future phases (but only this initial phase agreed)

- the business has a key vendor partnership obtained through the current business

- the other 3 directors have contributed little to nothing since forming, wrt building the actual business (beyond just contracting). I.e. contributed nothing in terms of development of infrastructure of the actual business.

- we had a drafted Shareholders Agreement drawn up by a member on this forum, but it lacked in enough depth, and didn't include non solicitation clauses, nor moonlighting clauses.

- as 4 shareholders when we formed the business it was a full frontal agreement solicitation and moonlighting were grounds for gross misconduct

- there has been a difference in terms of total contributed to the collective pot. Some have contributed £200k , others have contributed £80k

Now the crux of the issues
- one director has decided to leave, and tried to hold the bank balance hostage, but I've wrangled control back from this

- the leaving director wants a payment toward his equity share, but has instructed his clients to wait to pay the company until he's negotiated his exit (again in effect holding the business ransom to those receivables)

- upon leaving, this director intends to take his two clients with him and Bill directly

- he's also made an accusation about one other director implicating them in moonlighting, but is unable to provide evidence to that fact owing to his personal connection requesting him to not disclose

- we understand this is a previous client of ours being moonlighted with

I'm leaning toward shutting the business and opening a new one to trade from, as apart from these issues, the business is a going concern, but ones leaving and holding the company to ransom and the other is also acting against his fucidiary duties to the business.

Any advice on how to proceed here in the cleanest method possible, while allowing the business to continue, without paying out to these bad actors who've acted in blatent disregard to the ltd company?

Thanks in advance.

 

[Newchodge]

Speak to @The Resolver

Your explanation is not at all clear.

You have, presumably set up a limited company. What is the shareholding split?

I assume all 4 shareholders are Directors?

Is the sales function a person? If so, are they an employee, agency worker, shareholder or what?

The collective pooled funds equated to 50k per month. Wree they payable monthly?

Was the differential contribution agreed, or has it just happened?

The director who wishes to leave - they are currently acting against the interests of the ltd company. The company could sue them.

What, exactly, does this mean?

- as 4 shareholders when we formed the business it was a full frontal agreement solicitation and moonlighting were grounds for gross misconduct

Is there a written agreement about this?

Why are some directors 'more junior'?

 

[IDoIT]

Apologies @Newchodge

Yes we set up a ltd company structured 25% for each Shareholder (done in naivety but with good intentions of keeping a flat matrix structure).

As we were all basically IT contractors (working as independent freelancers) directly with clients we decided the easiest method of pooling funds toward building an actual consultancy was to continue operating directly with our clients, but redirect funds into a collective pot under the ltd company. The Ltd company also had it's own set of direct B2B clients, albeit in small measure compared to the majority of revenue being generated by 'contracting'.

Hence we treat those contractor billables as 'revenue' and used the funds to expand and build the business, while paying each of the directors a flat £5k a month.

The sales function is 2 individuals, currently as employees on PAYE, a sales lead and a presales engineer, who are non-billable resource but combined have about 3 decades more experience than the collective experience of the 4 directors.

All 4 shareholders are directors also.

The collective funds of circa £50k pm were our income as outside IR35 contractors with various projects and clients - against our names individually as directors, but as I say, payable into the ltd company bank account.

The differential contribution has just come about because some directors chose / had the opportunity to take on an additional client. Those who didn't, didn't because the opportunity never arose. So some would be billing 1 client month on month, while some were billing 2 clients month on month, and generating double the revenue.

While we have a draft form of a SHA that had been circulated for review, it's lacking in it's current form relating to non-solicitation (which feels like a neglect on our solicitor's part for not realising to include that?) and also moonlighting provisions that haven't been accounted for. This was not signed by the directors due to review time, which then fell by the wayside as we got busy building things / generating revenue. A huge oversight on the directors part. I understand there is precedence that a circulated terms of agreement, signed or not, qualifies as being valid in the event of non-signature, but the key clauses around moonlighting and non-solicitation don't exist anyway so not sure what use it is to us.

The non-solicitation wouldn't apply anyway as they were clients in the individual directors names, not the Ltd company.

For the gross misconduct point, this was raised during a company meeting during formation, but again wasn't included in any paperwork, despite all partners being clear and aware this was the case.

Some directors are considered more junior because they lack the fundamental experience (in hindsight) to understand running and scaling a business, vs running as an independent freelancer / senior employee of another consultancy, and that lack of apparent acumen came out during operational issues - e.g. hiring of employees, or other decisions around the business that really they voted for clearly the wrong items or threw around the fact they were a 'director' as being sufficient reason for their rationale.

 

[Newchodge]

Ok so you have a company with a complex structure and no paperwork about it that is enforceable.

Have the 4 of you tried sitting down and talking about it?

 

[IDoIT]

Ok so you have a company with a complex structure and no paperwork about it that is enforceable.

Have the 4 of you tried sitting down and talking about it?

Yeah... Unfortunately so. It's gotten complicated over time, not that it begun that way.

We've tried, but everyones pig headed-ly stuck in their positions, and moreso it's the nature of everyone playing the right tune up front but then acting behind closed doors.

 

[brucegreig]

Sounds like you might want to sit everyone down with a neutral mediator. The Resolver on this forum is one, I'm another. There are plenty more. Google "Commercial Mediator", or look on Civil Mediation Council website.

Mediators are trained to manage a structured negotiation process between disputing parties, with the aim of helping all sides find an acceptable resolution. Unlike an arbitrator or a judge, the mediator just manages a process, rather than actually deciding anything for you. It is a voluntary process, and only binding if you reach an agreement which you intend to be binding.

 

[Paul Kelly ICHYB]

during this time the ltd company billed clients, while contracts were in name of director directly.

That's an issue in itself - probably would conflict with an anti compete clause?

 

[Lisa Thomas]

Sounds like a few options could be viable here. Some of the shareholders could buy the others out. An insolvency procedure, like liquidation might be suitable, or might at least sharpen everyone up to have a sensible discussion.

I know a good mediator I can recommend, or happy to discuss insolvency options.

 

[The Resolver]

To answer a question , directors will be liable to compensate the company for rany financial loss due to moonlighting whether or not there was an anti-moonlighting clause in the SHA.. Their duty in law (s172 of Conpanies Act 2006) is to show effort to make the business successful. Actively taking steps that remove client opportunity is a breach. Once he has resigned however he no longer has any such obligation. Post exit non-solicitation is not restricted save if can prove work done to achieve that carried out before resignation as Director.

As to the non-signing of the SHA, if can show all agreed , eg by emails, or raised no objection when iinvited to comment , and then proceeded to form and run the company, then you could possibly prove the validity of the SHA by such conduct notwitjhstanding the absnce of signatures, But you need to prove that acceptance by conduct for all 4 of you,

As to mediation, the most important element is the factt rhat the mediator will have separate private conversations with each Director and , by agreement, what is said by one will not be shared with others without agreement . This 4 way parallel confidential discussion is the key to helping to brain storm and ident[fy solutions to which all may agree.

As to askimg clients to not pay, that is again a clear breach of s172. Of course as all agreed that the clients will be clients of the company (in issuing the invoices) the others can, through the company, enforce payment.,

 

[IDoIT]

To answer a question , directors will be liable to compensate the company for rany financial loss due to moonlighting whether or not there was an anti-moonlighting clause in the SHA.. Their duty in law (s172 of Conpanies Act 2006) is to show effort to make the business successful. Actively taking steps that remove client opportunity is a breach. Once he has resigned however he no longer has any such obligation. Post exit non-solicitation is not restricted save if can prove work done to achieve that carried out before resignation as Director.

As to the non-signing of the SHA, if can show all agreed , eg by emails, or raised no objection when iinvited to comment , and then proceeded to form and run the company, then you could possibly prove the validity of the SHA by such conduct notwitjhstanding the absnce of signatures, But you need to prove that acceptance by conduct for all 4 of you,

As to mediation, the most important element is the factt rhat the mediator will have separate private conversations with each Director and , by agreement, what is said by one will not be shared with others without agreement . This 4 way parallel confidential discussion is the key to helping to brain storm and ident[fy solutions to which all may agree.

As to askimg clients to not pay, that is again a clear breach of s172. Of course as all agreed that the clients will be clients of the company (in issuing the invoices) the others can, through the company, enforce payment.,

Thanks Graham

We've not spoken as yet, but I'll reach out for advice and go from there.

Appreciate the comment.