Director Misconduct Process

[ThayJay]

Good evening all,

So I have a couple of questions, mostly in a legal remit, I'd like to point out that I am speaking to my solicitor on Friday. But would like some thoughts from independent people such as yourselves.

Overview: Family LTD company. 5 Shareholders (60/10/10/10/10). 25 years of business. 2 10% Shareholders are Directors. 60% Shareholder, also a Director.

Shareholder 1: 10%. Director. Runs the business day to day for last 5 years.
Shareholder 2: 10%. Director. No access to day-to-day running; been away. "Shadow" Director.
Shareholder 3: 60%. Director; company founder. No day-to day-running. Effectively retired.

Shareholder 2 has returned to the business after being away for 4-5 years. Has had several meetings with all shareholders. Has found that Shareholder 3 has been abusing their powers to purchase items for personal use to avoid tax paying. Has also put the business into significant debt (circa. £200k) and potentially put the business on brink of failure/insolvency.

This is still being looked into but there's 5 years of accounts to be validated with much push back from other Directors. Enough evidence to prove the above as accurate. Shareholder 3 has also (borderline) verbally abused Shareholders to make them do as they want.

It is firmly believed that Shareholder 3 has put the business in debt to purchase a house for financial gain (Buy to Let, proceeds going to Shareholder 3). Shareholder 3 took business card, by force, and purchased circa. £15k equipment for himself. There may be an intent to pay back £12,000 to the business account; saving themselves £3,000 as company has absorbed the VAT (registered). They also put all fuel costs through the business for another company they run (yet to be validated).

Shareholder 3 believes they have a "god given right" to do the above. No regard for the business or its longevity. Constant threatening behaviour of others within the company. Illegal business practices.

All minority shareholders want rid of the majority shareholder before they lose everything. The business has been maintained day-to-day but standard business practice is below average standards. Through no main fault of the Shareholder 1.

Shareholder 2 plans on dethroning Shareholder 3 with the potential to have their shares revoked and dismissal as a Director.

My question is quite a simple one; if all of the above is correct and evidence can be provided is there enough weight there for the above plan to be an actual outcome with help of Companies House, HMRC & The Insolvency Service?

The main objective is for the company to survive. Does anyone have any advice? It's sincerely appreciated.

 

[obscure]

Company money belong to the company... not the shareholders and not the Directors. It can be distributed to shareholders/Directors but they have no right to simply take money for their own benefit.

Shareholder 2 plans on dethroning Shareholder 3 with the potential to have their shares revoked and dismissal as a Director.

Unless you have a shareholders agreement that specifically allows you to "revoke" shares then it isn't happening. The shares belong to him.
He may agree to sell them (or may not wish to) or you might convince him to give them up in return for avoiding legal action/being reported to the tax man.

As for dismissal as a Director... also problematic. You would have to call an Extraordinary General Meeting (EGM) and propose his removal and it would need to be approved by a majority of shares voting in favour. Given that he has the majority of shares that isn't going to happen.

Despite the discouraging info above it doesn't mean all hope is lost. If what you say is true then he has breached his fiduciary responsibilities as a Director, is possibly guilty of tax evasion and potentially embezzling/fraud. The two remaining Directors can take legal action against him on behalf of the Company to recover its money. You are going to need to talk to a lawyer.

 

[The Byre]

I suggest you talk to @The Resolver first. See his profile for details.

HOWEVER - I do not need to be clairvoyant to see that you are shareholder one and your father is shareholder three. This is a family matter and you have got 10% of not a whole lot - and getting less by the day! He is spending money that he sees as his own to do with as he feels fit.

You have a choice in the Real World. Walk away and get your own thing going or sit tight and be miserable as your father spends and spends. The equity you have left in this company is not enough to buy a Nissan Leaf - I would walk and leave him to blow the little left - but you might consider making it clear to him that you will not be there to pick up the pieces when the party's over!

 

[Mark T Jones]

Which do you value more, family or business?

 

[ThayJay]

Company money belong to the company... not the shareholders and not the Directors. It can be distributed to shareholders/Directors but they have no right to simply take money for their own benefit.


Unless you have a shareholders agreement that specifically allows you to "revoke" shares then it isn't happening. The shares belong to him.
He may agree to sell them (or may not wish to) or you might convince him to give them up in return for avoiding legal action/being reported to the tax man.

As for dismissal as a Director... also problematic. You would have to call an Extraordinary General Meeting (EGM) and propose his removal and it would need to be approved by a majority of shares voting in favour. Given that he has the majority of shares that isn't going to happen.

Despite the discouraging info above it doesn't mean all hope is lost. If what you say is true then he has breached his fiduciary responsibilities as a Director, is possibly guilty of tax evasion and potentially embezzling/fraud. The two remaining Directors can take legal action against him on behalf of the Company to recover its money. You are going to need to talk to a lawyer.

Thank you for the information, it's sincerely appreciated.

I suggest you talk to @The Resolver first. See his profile for details.

HOWEVER - I do not need to be clairvoyant to see that you are shareholder one and your father is shareholder three. This is a family matter and you have got 10% of not a whole lot - and getting less by the day! He is spending money that he sees as his own to do with as he feels fit.

You have a choice in the Real World. Walk away and get your own thing going or sit tight and be miserable as your father spends and spends. The equity you have left in this company is not enough to buy a Nissan Leaf - I would walk and leave him to blow the little left - but you might consider making it clear to him that you will not be there to pick up the pieces when the party's over!

Thanks for the reply - I wouldn't go as far as calling you clairvoyant, I'm actually Shareholder 2. Family related or not, it's first and foremost a regulated business. One of which 10% of total assets plus the pension scheme sits at a lot of which he is spending away, just as you say. The money aspect isn't the problem for me, it's the wrongdoing.

I have several things going of which this business is one that I am reluctantly getting involved with as other shareholders have more to lose than myself yet don't have the ability or money to take legal proceedings, of which I do. The equity in the business means little to me, I've be running a Model X for three years, I don't need to worry about the financial benefits for myself.

Whilst I feel your response is thoughtful, it's clearly not seeing the bigger picture. Regardless to family matters or wealth; it's a wrong that needs to be righted. Thanks for the response, it's appreciated.

Which do you value more, family or business?

Business and the family I choose.

 

[The Byre]

Whilst I feel your response is thoughtful, it's clearly not seeing the bigger picture. Regardless to family matters or wealth; it's a wrong that needs to be righted.

I can't see the bigger picture for obvious reasons - again, talk to @The Resolver. He specialises in this sort of thing.

On a wider point - family businesses are a nightmare because personal animosities and likes and dislikes all play an enormous role. Your father is still relatively young - younger than I am - and probably perfectly capable of making decisions about his life.

However, if there is a wrong to be righted, Graham (Resolver) will tell you how to right it.

 

[Chris Ashdown]

As a Director you have had the responsibility to be aware of all that goes on in your company, so how have you not been aware of this money going out of the company and put through the accounts as a directors loan account

You have the ability to have a outside audit of the company of which the company pays for which may give a fuller situation report

As others have stated little value left so your 10% may be very small if anything, might be better to consider resigning as a director,now you have found out whats happening and start afresh on your own

He may well be able to say that as majority shareholder he brought the house as a investment for the company

 

[Lisa Thomas]

How did your Solicitor meeting go?

If all else fails and Shareholder does not rectify the personal spending then you could look to put the Company into Liquidation or Administration and the other family members buy the business back via a Phoenix.

That would of course be a last resort given the stress, costs, time and risks involved!

 

[Chris Ashdown]

How could you put the company into liquidation with only 20% ot the shares

 

[DontAsk]

How did your Solicitor meeting go?

It's only Wednesday

 

[Lisa Thomas]

It's only Wednesday

Ha, I thought it was posted last week. I had Monday off and its thrown me!

 

[Newchodge]

It's only Wednesday

actually it was only Tuesday when you posted that.

 

[The Resolver]

As for dismissal as a Director... also problematic. You would have to call an Extraordinary General Meeting (EGM) and propose his removal and it would need to be approved by a majority of shares voting in favour. Given that he has the majority of shares that isn't going to happen.

Not quite . You have one opportunity to take advantage of his possible ignorance of the voting rules and remove him as director on a show of hands with one vote per Shareholder. However he would quickly learn his mistake and then hold another meeting to appoint himself as director again. There are steps to take in the interim ( at least 28 days ) that will increase his desire to reach an agreement. There is also the possibility to prevent his reappointment by just not turning up at the second meeting to prevent a quorum. Now that can be overcome by Mr 60pc but its costly. As Dan (obscure) says, there is also the potential for a derivative court action against him for breach of duty resulting in an order to repay the company the monies wrongly taken. Finally you may have enough evidence to threaten action

 

[The Resolver]

......(unfinished) to report for declaration that he is unfit to be a director. See https://www.gov.uk/company-director-disqualification

 

[Lisa Thomas]

actually it was only Tuesday when you posted that.

I'm not the only one who has my days mixed up!

 

[The Resolver]

I should add that you should not be taking action piecemeal but the 10pc shareholders should agree a strategy designed to bring him to the negotiating table. Often rushing into threats of Legal action at the outset only pushes him to a lawyer and the chances of reaching agreement become lessLikely. Legal action may become eventually necessary but best to demonstrate First your powers to begin disabusing him of the idea that he has total control and helping him to understand it is in his interests to reach agreement\.You can call me for a chat and further advice at no charge