Dissolving Company to remove Director?

Discussion in 'Legal' started by mikey100, Aug 1, 2008.

  1. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi- just wondering if anyone can help out on this issue

    I am currently a director of a small business- along with two co-directors -we are also the companies only employees.

    Due to a considerable decrease in turnover the company can no longer sustain the three of us (or our rented premises)- at our board meeting we decided that the premises would go- and one of us would need to resign.
    we discussed all of the possible scenarios and permutations- to decide which would be best for the company-one of my co-directors has little input into the company and little interest- so it was suggested that they should resign with a payment representing their third share of the company- about £6k- they initially (reluctantly)agreed- but have since changed their mind- but we cannot continue as is

    I know we cannot forcibly remove a director and the person has already mentioned constructive dismissal and developed a convenient work related disorder- which i think would come back to haunt us even if they did resign and the two remaining directors continued with the current company

    It would seem that our only option is for the current company to cease trading on a 2:1 vote- and for the two 'keen' directors to set up another company doing the same work/with existing customers

    Sorry for the long winded history- but now to the questions!

    If we did the above would the disgruntled ex director/employee- have any legal grounds to claim against the new company-as we would effectivley be doing the same work under a different(but ideally very similar) name- is this the best way to go- or is there another alternative?
    I really would appreciate any help or guidance on this- we are at our wits end with this situation
    thanks
    Mike
     
    Posted: Aug 1, 2008 By: mikey100 Member since: Aug 1, 2008
    #1
  2. Anna Chandley

    Anna Chandley UKBF Ace Free Member

    Posts: 1,503 Likes: 460
    I assume that each of you has 1/3 of the company shares and have no special terms in your mem and arts and do not have a shareholders agreement.

    To voluntarily wind up a company requires the shareholders to pass either a special or extraodrinary resolution. These resolutions require a 75% majority. If my assumption that you each own 1/3 of the shares is correct then all three shareholders would have to vote in favour of winding up.

    You need to bear in mind that each of the current directors has three distinct and seperate roles

    Holding the office of director
    Employee of the company
    Shareholder
    .

    An ordinary resolution is required to remove a director in his position of office holder. An ordinary resolution requires a simple 51% majority however you are required to give notice to all shareholders that a vote will be taking place. A director who holds shares may also be able to seek protection against unfair predjudice via the courts. For example if you removed the director then gave the remaining directors large bonuses instead of paying dividends then the removed director could claim this was unfair.

    Remove a director from his post as office holder is not the same as dismissing him as an employee. In this case if you removed the director he would remain an employee. You would need to follow the normal procedures for dismissing an employee. This is not my area of expertise so I cannot advise on this.
     
    Posted: Aug 2, 2008 By: Anna Chandley Member since: Jun 2, 2008
    #2
  3. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi Anna,

    Thanks for that- we are equal shareholders- I didn't know about the 75% thing

    Sounds like we're pretty much stuffed then!

    - unfortunately we have just kind of 'put up with' the non performance of the director over the last couple of years and just taken up the slack ourselves- so we have no real records or evidence to support a dismissal- anything for an easy life!- (but a valuable lesson for anyone else in this situation!!)- so i think we would be looking at an unfair dismissal scenario if we went this way- and a constructive dismissal if we 'persuade' them to resign!

    regards
    Mike
     
    Posted: Aug 2, 2008 By: mikey100 Member since: Aug 1, 2008
    #3
  4. MartCactus

    MartCactus UKBF Enthusiast Full Member

    Posts: 982 Likes: 214
    Appreciate that you probably have some money tied up in the old company... how about declaring a dividend to pretty much clean it out?

    Then you and the other good director both resign as directors. and employees. You would remain shareholders.

    Your old company would then probably fail pretty quickly?

    Meanwhile you've setup a new company (though research whether you have any non competition clause).
     
    Posted: Aug 3, 2008 By: MartCactus Member since: Sep 24, 2007
    #4
  5. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi- thanks for that,

    It is definitely something we will have to consider- and it would undoubtably work-the big issue for us is that the company has 2 large-ish long-term contracts- (both were tendered for and secured by me- (on behalf of the company)- and I am really the only one who works on them)-and without them it would be pretty much pointless setting up a new company-unless the new company looked and sounded exactly like the old one- and managed somehow to take over the contracts-without defaulting on them- but my guess is that is fraud!??!
    Mike
     
    Posted: Aug 3, 2008 By: mikey100 Member since: Aug 1, 2008
    #5
  6. Ozzy

    Ozzy Quite simply, me. Full Member - Verified Business

    Posts: 3,398 Likes: 156
    Hi Mike,
    An issue very much like what you are describing was discussed in last months newsletter of mine, which I think provides you with some useful advice for this situation you are experiencing.

    http://news.quickformations.com/jul08/legal_financial.html

    Gary who wrote supplied the article is a friend of mine who I will also be happy to put you in touch with if needed.
     
    Posted: Aug 4, 2008 By: Ozzy Member since: Feb 9, 2003
    #6
  7. mahutchinson

    mahutchinson UKBF Newcomer Free Member

    Posts: 1,058 Likes: 110
    I would agree regarding the employee/director split. You should be able to vote the director out - constructive dismissal would relate to his role as employee only.
     
    Posted: Aug 4, 2008 By: mahutchinson Member since: Mar 17, 2008
    #7
  8. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi- thanks to everyone who has taken the time to respond- it has been very helpful- i don't think it's going to be easy to resolve- but i think there might be a chink of light at the end of the tunnel!
    regards
    Mike
     
    Posted: Aug 4, 2008 By: mikey100 Member since: Aug 1, 2008
    #8
  9. Free Lance

    Free Lance UKBF Regular Free Member

    Posts: 420 Likes: 153
    If I can chip in. As has been said before, there are three roles that you need to address for, let's call him, Mr X: Director, shareholder and employee.

    Director is easy - provided the correct procedure is followed (section 168 of the Companies Act 2006) you can dismiss him as a director as you can get more than 50% of the votes at shareholder level.

    Employee is more difficult, but is there not a case for a simple redundancy? Having this illness doesn't help but there should be someone more specialised on that area who can give some advice.

    Removing him as a shareholder is going to be pretty difficult. You can't issue new shares to yourselves to dilute him down. You can't change the articles to somehow create a situation where he would be forced to sell. Not much you can do.

    My main point is that you can't simply ignore him and set up elsewhere - you would be in breach of your duties as directors to your current company and Mr X would have a pretty much open and shut case against you if he wanted to spend some money on getting lawyers involved. He could claim that every £ of profit new company gets belongs to the current company in which he holds 33.3%.

    If you put it to him in pretty stark terms that the company will fail if things carry, he can be removed from management but that you want to pay out his shareholding (or half of it - enough to get you over 75%) then perhaps he will listen to reason.

    Best of luck
     
    Posted: Aug 4, 2008 By: Free Lance Member since: Jul 3, 2008
    #9
  10. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi- thanks for that- i think it sums up exactly where we are!

    we have decided to give the buy-out one more chance this week

    Then if not how about his for an option?

    Could we both resign as directors and employees- maintaining our shares- -then start up a similar business in competition?

    Any comments would be appreciated
    regards
    Mike
     
    Posted: Aug 5, 2008 By: mikey100 Member since: Aug 1, 2008
    #10
  11. Free Lance

    Free Lance UKBF Regular Free Member

    Posts: 420 Likes: 153
    Short answer. No. Even after you cease to be a director of the current company you will still owe it duties not to set up in competition. So the same analysis applies - newco would only be earning profits for the benefit of the current company.

    If you happened to resign then exploited an unexpected business opportunity some time later that was in competition with the current company then that kind of thing is more defensible. However, knowing that you intend to set up in competition purely as a way to exclude the current director/shareholder is a very clear breach of your duties.

    A more practical consideration is who is going to complain. Obviously the excluded director - but will he throw a £000s after a claim when? He might if newco does well in the future. The other candidate to complain is a liquidator. If you leave any of your creditors of currentco in the lurch to set up in competition the liquidator will have no qualms about coming after you.

    Go for the buy out if at all possible. Think of ways to sweeten the deal without damaging cash flow - some money now and some in the future if newco does well without Mr X. However, you also need to remember who is paying for what. The company can pay Mr X an amount to settle claims he might have against it (which I think are still tax free up to £30k if there is no pay in lieu of notice clause in his service agreement - I don't think there is one?).

    However, the company cannot do anything to assist in the acquisition of Mr X's shares. That must come from the buyer of the shares personally (i.e. you and other shareholder). If the company gets involved in that then it is a criminal offence and makes the transaction void (unlawful financial assistance).

    How about company pays Mr X £[x] to settle claims and leave (signing a compromise agreement - which he must get independent legal advice on to be binding) and each the shareholders pay £1 for his shares but with an obligation to pay a further £[y] if profits of £[z] are achieved in any time in the 2 years after his exit.
     
    Posted: Aug 5, 2008 By: Free Lance Member since: Jul 3, 2008
    #11
  12. mahutchinson

    mahutchinson UKBF Newcomer Free Member

    Posts: 1,058 Likes: 110
    You could do that but then you have no control over what the remaining director is doing with the company - almost certainly he will not comply with legal requirements regarding your rights as shareholders. Also you will have a fundamental conflict of interest in running one business and owning a competitor. I don't see any reason why the directors cannot resign to set up in competition - people do this every day perfectly legally and there is no mention of competition clauses in any contracts. To prove it was being done to exclude the other guy would be virtually impossible (other than citing this forum).
     
    Posted: Aug 5, 2008 By: mahutchinson Member since: Mar 17, 2008
    #12
  13. Free Lance

    Free Lance UKBF Regular Free Member

    Posts: 420 Likes: 153
    I disagree with MAH on the law. I am sure that there are plenty of situations where one group of directors have walked away from another and set up a rival business and nothing has come from it. I am advising on just such a problem at the moment where the 'good director' is happy to let the 'bad director' take some clients and set up elsewhere - just to be rid of him and move on. However, the very clear legal rule is that directors (or former directors) are not permitted to do so unless all of the shareholders in the first company agree. This area of the law is mostly case law but its very clear that the courts take a hard line approach about this.

    The point I made in my previous post was that it would be costly for aggrieved director to pursue such a claim and for the figures you are talking about - a settlement of c.£6k - would the aggrieved director really bother spending £10k on the opportunity of gaining a 33% interest in company that may or may not be profitable in the future (here's hoping that it is of course)?
     
    Posted: Aug 5, 2008 By: Free Lance Member since: Jul 3, 2008
    #13
  14. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi- thanks again everyone- useful stuff!

    I think we'll have a go with the compromise agreement and the sweetener as suggested-

    there is a little more to it than just financial considerations for mr X though!- unfortunately i think legal action on some front was inevitable- all the signs are there- the best being the fake 'industrial' injury(lol)- i think he would actually prefer it to go down with all hands- so any action would be to deprive the company of funds - rather than for personal gain.

    Still we'll give it a go!
    thanks again
    Mike
     
    Posted: Aug 5, 2008 By: mikey100 Member since: Aug 1, 2008
    #14
  15. mahutchinson

    mahutchinson UKBF Newcomer Free Member

    Posts: 1,058 Likes: 110
    I think we're talking at cross purposes - I am not suggesting that there is any interference with the old business or taking of clients or information. Clearly, directors in a business can resign and set up a new business in the same industry otherwsie they would all be sitting at home redundant.
     
    Posted: Aug 6, 2008 By: mahutchinson Member since: Mar 17, 2008
    #15
  16. noidea

    noidea UKBF Newcomer Free Member

    Posts: 1,978 Likes: 142
    What did you mean about when one of the director's agreed? Was this written in the minutes? I know for a fact that you should remove the director not start a new company. Whether that shareholder can stick themselves back on the board I am unsure about but you two directors have every power to remove that director form the board.
     
    Posted: Aug 6, 2008 By: noidea Member since: Aug 6, 2008
    #16
  17. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi Everyone- thanks for your help so far
    New development- the compromise agreement/sweetener has been declined- our co- director- as i suspected- wants the company to close to make sure that we don't go on to make a success of it in their absence.

    I am presuming that once it is officially wound up we would be able to start up a new company doing the same work without any problem- but what would be the take on

    the new company having a name that was very reminiscent of the old one

    the new company contacting the current customers- in particular ones that had contracts/booked work with the old company- with a view to taking the contracts on?

    would our co-director have grounds to take legal action?
    thanks again for your help and advice

    Mike
     
    Posted: Aug 7, 2008 By: mikey100 Member since: Aug 1, 2008
    #17
  18. noidea

    noidea UKBF Newcomer Free Member

    Posts: 1,978 Likes: 142
    Does your contract have a clause about it continuing as another entity etc.? If not the contracts will come to an end.
     
    Posted: Aug 7, 2008 By: noidea Member since: Aug 6, 2008
    #18
  19. mikey100

    mikey100 UKBF Newcomer Free Member

    Posts: 11 Likes: 0
    Hi- no clauses- just wondering about the possibility of being sued

    something along the lines of- "you left me no option but to vote for winding up- but it was all ochestrated just to get rid of me and set up a company to take the existing business"

    regards

    Mike
     
    Posted: Aug 7, 2008 By: mikey100 Member since: Aug 1, 2008
    #19
  20. Chris Ashdown

    Chris Ashdown UKBF Legend Free Member

    Posts: 8,678 Likes: 1,774
    If you close down the company, then you can start a new business as xxx (2008) ltd or simular as many bankrupt companies do after being brought
     
    Posted: Aug 7, 2008 By: Chris Ashdown Member since: Dec 7, 2003
    #20