Ltd Company Breakdown Between Directors

[SkylarPat92]

Hello,

My friend and I incorporated a Health Suite/Spa back in early 2021.
The shares were split 50 / 50, so we have an equal stake in the business.

Initial deal was;
I find and buy a premises (through my property Ltd company, of which I am sole owner) as well as finance the majority of the equipment required in my own name. I also take care of 95% of the running of the business - admin, stock, marketing, accounts, legals etc...
As for my partner, she had an extensive clients list, as she has operated in this industry for far longer than myself. Overnight, she brought approx 75 clients to the business, something that would have taken me months and months to do on my own. Also, she would run the group sessions for the business, of which there was 8-10 per week.
A side note, to date I am due £50,000 back from the company in Director's Loans, and she is due £15,000.

First few months were great, business went well, and we quickly grew to 125+ clients, which is incredible for a business of our sizes in a small town.,
However, there were occurrences of her going "AWOL", usually at the start of a week, after overindulging at the weekend.

Unfortunately, as time has went on, this has become more of a regular occurrence, with her once disappearing for a week at a time, with no contact.
I have counted up the number of no shows for client appointments and group sessions, and it currently sits at 86, in just over 2 years.

We have spoke about this numerous times in the past and she always says she will do better, but this only lasts a matter of weeks until it all breaks down again.

Ideally, a bit more money would be invested into the company as we grow, but I am unwilling to do so, while the shareholding is at 50 / 50. I have made numerous offers in the past for varying % of her shares, from 1% to 10%, all of which have been rejected, as I do not want to increase my director's loan further, without having full control on when i can access that money, if required.

Recently, we have had an official meeting, which also involved all of our self employed staff. The feeling was mutual. No one wanted to continue to work in this environment, and we all feel the best way to proceed would be for her to part ways with the company.
It was mentioned, that this behaviour anywhere else, would result in a terminated contract, and she is hiding behind her directorship, believing she can get away with anything she wants. She acknowledged this.
At the end of the meeting, she stated her price to buy her 50%. It was more than 10 times what 50% would be worth. If she could achieve that value, then to be honest, i'd be selling my 50% too!


I am now at the point where I need this resolved. I cannot be in business with her any longer. I need to break away, and do this alone, bare in mind I now have the premises in my name to continue working form, or starting afresh.
She is destroying the name and reputation that was built up, as well as creating a very hostile environment in the premises, which has been noted by our clients.

Any advice would be massively appreciated.

Thanks

 

[japancool]

Paging @The Resolver.

 

[Lisa Thomas]

If the company is unable to repay the DLA's it may well be insolvent. There may always be the option of liquidating (through the court if she won't agree to a voluntary liquidation) and a Phoenix...

If the company is insolvent her shares are probably worthless.

Might be worth you discussing that risk with her.

 

[BubbaWY]

bare in mind I now have the premises in my name

Can you bar her from the premises? Regardless of whether she is a director/shareholder the business which occupies it?

 

[SkylarPat92]

If the company is unable to repay the DLA's it may well be insolvent. There may always be the option of liquidating (through the court if she won't agree to a voluntary liquidation) and a Phoenix...

If the company is insolvent her shares are probably worthless.

Might be worth you discussing that risk with her.

Hi Lisa,

Appreciate the reply.

I did think about that, but i would lose my £50,000 directors loan if we went down the liquidation route. Money I can't afford to lose out on.

 

[Paul Kelly ICHYB]

If you financed everything, what does the business own, outside of the clients?

 

[SkylarPat92]

If you financed everything, what does the business own, outside of the clients?

Everything that was financed, has now been paid off.
The repayments were made from the business account and are regarded as business assets.
Approx £30,000 in business assets

 

[pentel]

Approx £30,000 in business assets

Is this the value on the books or what you could realistically get for them if you were to liquidate?

Either way it looks like the company is insolvent.

 

[MikeJ]

So...

call in the outstanding loans. The company can't fund them, and folds. You take the existing assets as part repayment. Pay her the £15k she's owed, which is better than she's entitled to by the sound of it.

You start a new company in the premises you already own, with the equipment that is now yours (not the new company's).

Look at a loyalty scheme for the staff you have working for you (also check if they're employees, regardless of what you may think)

 

[Lisa Thomas]

Mike...OP needs to be extra cautious about taking assets in part payment.

It will amount to an illegal preference/transaction at an undervalue/misfeasance if there are other creditors outstanding.

 

[Lisa Thomas]

Hi Lisa,

Appreciate the reply.

I did think about that, but i would lose my £50,000 directors loan if we went down the liquidation route. Money I can't afford to lose out on.

If the business is insolvent and can't turn around/trade out of it then you may never get that money back anyway. A CVA might be viable but again depends on the other facts and debts in the company.

 

[MikeJ]

Mike...OP needs to be extra cautious about taking assets in part payment.

It will amount to an illegal preference/transaction at an undervalue/misfeasance if there are other creditors outstanding.

True, I got the impression that she and the other director were the only creditors?

 

[Porky]

I have been in your shoes with a specific historic business I was involved in years ago so I know exactly what you are going through and it’s horrendous. In the future you will never do a 50/50 again.

Currently you will likely want to kill this person if it were legal, however, keep your business head on and keep it real NICE, in fact overly nice. You need to reach terms and once done you can tell her to go forth then

The issue is this person, doesn’t care less, they would rather you go bust than see you prosper. They would see you invest more cash and they would take more out of it not build the company, the advice of @MikeJ above is spot on however try nice first:-

Go have a coffee and friendly chat, it needs resolving, forget any other party. She needs to know the company is insolvent, put to her that you have had enough, taking it all on is a liability, could take years, paint a grim picture, would she be interested in buying you out at X (the amount you would pay her) plus your loan? See her reaction? (Remember you don’t have to sign anything, just a chat at this stage) if she says she’s not interested, then ask her how she sees this resolve, tell her you have thought about calling in your loan as you need the money and recover the maximum you can from any of the assets but all that would do is put the business into administration and you both lose.

Ideally you need to Engineer this situation so that she can go thinking she has won and you can rebuild from there. She needs to think you would struggle and not have the cash to buy her out Initially she will want silly money because she is stupid enough to think you will pay silly money because you want the business and also thinks she has you over a barrel as she has 50% you need to change this perception.

In my own case I ultimately reached terms, they accepted a smaller cash amount and some personal items from the company but it left a bitter taste in my mouth but within six months felt much better for it.

If it becomes impossible to get a resolve that can work, then plan b above is the only real alternative but better to negotiate albeit initially when it’s raw, it’s more difficult and you don’t want her just wanting to just spite you on principle hence why you need t9 bite your tongue and keep it real nice no matter how hard that becomes

Good luck, I don’t envy your position

 

[The Byre]

Yet another broken partnership thread! It seems to be an almost daily theme here.

However, there were occurrences of her going "AWOL", usually at the start of a week, after overindulging at the weekend.

In which case, something else is going on. When someone is behaving in a delinquent manner, that is a symptom of something else going wrong in their lives. As for her delinquent behaviour, it may not just be alcohol.

You have a rather stark choice here - either crash and phoenix the company somehow (and that is where someone like @The Resolver comes in and can show you the legal pathway to enlightenment) or sort your business partner out and set her straight - but that could prove a very hard task.

As for crashing the company, @MikeJ nailed it when he wrote -

call in the outstanding loans. The company can't fund them, and folds. You take the existing assets as part repayment. Pay her the £15k she's owed, which is better than she's entitled to by the sound of it.

My 30 cents worth would be to sit her down and tell her "Well done! You have managed single-handedly to destroy the company. It is now insolvent, thanks to you!"

She will of course plead her case and tell you that she will mend her ways . . . bla . . . bla . . . bla, to which you give her one last chance - "You miss just one appointment or not be here at nine in the morning, every morning, starting Monday and I am calling in my director's loan and the company fails and we all walk away with nothing!"

That will get her attention! It places her at a crossroads - she either sorts herself out or she crashes and burns.

The only alternative is to get deeply involved in her private life - and that is not something I would recommend! Life is too short to rescue every idiot determined to go off the rails and ruin their lives!

P.S.

Go have a coffee and friendly chat,

My bitter experience is that being nice becomes just another excuse to go back to their old ways. People like this need a wake-up call. Sympathy and understanding will be taken as weakness and an excuse to go back to their old ways.

 

[SkylarPat92]

Many thanks for everyone's responses.

It has helped just getting it all off my chest to start with!

I have a couple points, please instruct if i am wrong at any point....

1. Both directors are the only creditors of the company, myself at £50k and her DLA is at £15k.
The company is still trading well and turning a profit every month (albeit not as much as it has been in the past), which at the moment, is being reinvested straight back into the business - upgraded equipment & refurbishing other equipment
With that being said, is the business still classed as insolvent if there are no external/3rd party creditors and the company is still making money month on month?

2. I have looked into the liquidation route, but it seems an extremely expensive way of doing things. The advisor i spoke to said it would cost me £8,000 + VAT for their costs. They will then take all the assets, which I can buy back at 40p per £1, so approx another £12,000 + VAT, and then at the end of the day, I "might" see a little bit of cash back as a creditor, but it would be minimal.
In total it would cost £20000 + VAT and losing the majority of my £50,000 DLA, so £70k in total, to remove her and start afresh. Thoughts?

3. Sitting down for chat has happened too many times previously and things have just resorted back to how they are. I have told her I will go and open a new premises elsewhere and take 50-70% of the clients, but that didn't faze her.

Thanks again

 

[The Byre]

As The Resolver has not yet come on here - you can contact him at the links below -

Graham Ross, lawyer and shareholder mediator -07885 728801 l Resolve shareholder disputes
Negotiate deals /sales/settle disputes www.MySmartNegotiator.com l Book a 30mn Free advice call

 

[MikeJ]

With that being said, is the business still classed as insolvent if there are no external/3rd party creditors and the company is still making money month on month?

Someone else can comment more accurately, but I believe it's insolvent if it can't meet the payments it needs to make as they become due. Do you have a written agreement on the loan you made? If not, then as soon as you require repayment, the company becomes insolvent

I have looked into the liquidation route, but it seems an extremely expensive way of doing things. The advisor i spoke to said it would cost me £8,000 + VAT for their costs. They will then take all the assets, which I can buy back at 40p per £1, so approx another £12,000 + VAT, and then at the end of the day, I "might" see a little bit of cash back as a creditor, but it would be minimal.
In total it would cost £20000 + VAT and losing the majority of my £50,000 DLA, so £70k in total, to remove her and start afresh. Thoughts?

The £12k would be spread between the creditors, so you'd get 58/73rds of it back (the 8k would be added to the DLA). The other director would get the other 15/73rds.

I suggest you tell the other director this is what you're planning, and to expect £3k back. Or you can make her an offer for her shares, with that as the other option.

It's tough, but she has to be made to realise she's between a rock and a hard place.

 

[Lisa Thomas]

True, I got the impression that she and the other director were the only creditors?

OP hasn't mentioned other creditors so best not to assume (or make it clear that your advice is on the basis there are absolutely no other creditors).

From my experience there is almost always a debt owed to HMRC, redundancy and monies due to employees and lately a Bounce Back Loan.

 

[Lisa Thomas]

I have been in your shoes with a specific historic business I was involved in years ago so I know exactly what you are going through and it’s horrendous. In the future you will never do a 50/50 again.

Currently you will likely want to kill this person if it were legal, however, keep your business head on and keep it real NICE, in fact overly nice. You need to reach terms and once done you can tell her to go forth then

The issue is this person, doesn’t care less, they would rather you go bust than see you prosper. They would see you invest more cash and they would take more out of it not build the company, the advice of @MikeJ above is spot on however try nice first:-

Go have a coffee and friendly chat, it needs resolving, forget any other party. She needs to know the company is insolvent, put to her that you have had enough, taking it all on is a liability, could take years, paint a grim picture, would she be interested in buying you out at X (the amount you would pay her) plus your loan? See her reaction? (Remember you don’t have to sign anything, just a chat at this stage) if she says she’s not interested, then ask her how she sees this resolve, tell her you have thought about calling in your loan as you need the money and recover the maximum you can from any of the assets but all that would do is put the business into administration and you both lose.

Ideally you need to Engineer this situation so that she can go thinking she has won and you can rebuild from there. She needs to think you would struggle and not have the cash to buy her out Initially she will want silly money because she is stupid enough to think you will pay silly money because you want the business and also thinks she has you over a barrel as she has 50% you need to change this perception.

In my own case I ultimately reached terms, they accepted a smaller cash amount and some personal items from the company but it left a bitter taste in my mouth but within six months felt much better for it.

If it becomes impossible to get a resolve that can work, then plan b above is the only real alternative but better to negotiate albeit initially when it’s raw, it’s more difficult and you don’t want her just wanting to just spite you on principle hence why you need t9 bite your tongue and keep it real nice no matter how hard that becomes

Good luck, I don’t envy your position

Good advice here.

FYI I don't think Administration would apply, though.. More likely Liquidation.

 

[Lisa Thomas]

My 30 cents worth would be to sit her down and tell her "Well done! You have managed single-handedly to destroy the company. It is now insolvent, thanks to you!"

Good advice.

 

[Lisa Thomas]

As for crashing the company, @MikeJ nailed it when he wrote

"call in the outstanding loans. The company can't fund them, and folds. You take the existing assets as part repayment. Pay her the £15k she's owed, which is better than she's entitled to by the sound of it."

I don't agree. I don't think you can give this advice without knowing if there are other creditors and even then, some/all of the money from the asset sales may be better spent on an insolvency procedure.

 

[Lisa Thomas]

Many thanks for everyone's responses.

It has helped just getting it all off my chest to start with!

I have a couple points, please instruct if i am wrong at any point....

1. Both directors are the only creditors of the company, myself at £50k and her DLA is at £15k.
The company is still trading well and turning a profit every month (albeit not as much as it has been in the past), which at the moment, is being reinvested straight back into the business - upgraded equipment & refurbishing other equipment
With that being said, is the business still classed as insolvent if there are no external/3rd party creditors and the company is still making money month on month?

2. I have looked into the liquidation route, but it seems an extremely expensive way of doing things. The advisor i spoke to said it would cost me £8,000 + VAT for their costs. They will then take all the assets, which I can buy back at 40p per £1, so approx another £12,000 + VAT, and then at the end of the day, I "might" see a little bit of cash back as a creditor, but it would be minimal.
In total it would cost £20000 + VAT and losing the majority of my £50,000 DLA, so £70k in total, to remove her and start afresh. Thoughts?

3. Sitting down for chat has happened too many times previously and things have just resorted back to how they are. I have told her I will go and open a new premises elsewhere and take 50-70% of the clients, but that didn't faze her.

Thanks again

1. The company is insolvent if it can't pay its debts as and when they fall due, or is has an outstanding CCJ or unsatisfied statutory demand, or a negative balance sheet.

2. That sounds like a CVL. For a Compulsory it will cost c£3k to put into liquidation then c£10k for the Official Receiver's fees for acting as Liquidator.

I'm very curious to know how the IP decided they could sell you the assets back at 40% market value...I wonder what the creditors, their auditors and licensing body would think of that!

There is always some wriggle room to allow for costs of a sale to a third party ( i.e removal, storage, auction fees etc) but I've never heard it fixed at 60%. The sale should be based on the market value of the assets.

3. Not ideal as it might only act as a sticking plaster but could she be convinced to resign as a director, given she is not putting in 100%?

To my mind it may be best to liquidate, set up a phoenix and buy the assets back off the liquidator. A fixed fee can probably be agreed but the costs will be paid for from the assets so a professional valuation can be needed. Most IP's can facilitate this. But you will need to accept that a lot or possibly all of your DLA will not be recoverable I'm afraid.

However that might be better than slogging your guts out and trying to make this a success around her behaviour, which sounds like it might be likely to get worse, and sharing the profits with her.

 

[Lisa Thomas]

OP hasn't mentioned other creditors so best not to assume (or make it clear that your advice is on the basis there are absolutely no other creditors).

From my experience there is almost always a debt owed to HMRC, redundancy and monies due to employees and lately a Bounce Back Loan.

FYI I didn't see OP's reply confirming there were no other creditors when I wrote this as I was working my way down the thread.

 

[The Byre]

I don't agree. I don't think you can give this advice without knowing if there are other creditors and even then, some/all of the money from the asset sales may be better spent on an insolvency procedure.

The OP stated clearly that there are no other creditors and we must take what we are told by those seeking informal advice on a public forum at face value (and of course the mandatory pinch of salt!) She sounds OK, i.e. genuine and the situation is extremely common.

That fact is that when dealing with people, you are dealing with organisms with a complex array of strengths and weaknesses - some of which are drugs, alcohol, temper tantrums, violence, intelligence, malevolence, discipline and a lack thereof. For that reason, I have learned (the hard way!) to pay by results. In other words, if they want to screw up, they do so at their own expense!

But the moment a company looks vaguely as if it is to be sent to the graveyard, all sorts of people (lawyers, accountants, IPs and others) start salivating and want to pick over the bones to see what they can harvest from someone's broken hopes and dreams.

There will be a perfectly viable and legal way to rescue this situation without that unsightly feeding frenzy!

 

[Mark T Jones]

OP hasn't mentioned other creditors so best not to assume (or make it clear that your advice is on the basis there are absolutely no other creditors).

From my experience there is almost always a debt owed to HMRC, redundancy and monies due to employees and lately a Bounce Back Loan.

I recently had a customer put one of his companies into liquidation owing about £500K

There were just 3 creditors, being the 2 shareholder/directors and HMRC.

The debt to HMRC was £1. Which set me wondering whether the system was set up on the basis that HMRC couldn't possibly be zero? (Sorry, off topic, just a thought)

 

[The Resolver]

Is there a lease/tenamcy agreement between your property company and the Spa company? If so is rent being paid?

 

[UK Contractor Accountant]

With hindsight you should have taken a legal charge over the assets of the company, fixed and floating, as a condition of providing loan finance.

 

[Lisa Thomas]

The OP stated clearly that there are no other creditors and we must take what we are told by those seeking informal advice on a public forum at face value (and of course the mandatory pinch of salt!) She sounds OK, i.e. genuine and the situation is extremely common.

That fact is that when dealing with people, you are dealing with organisms with a complex array of strengths and weaknesses - some of which are drugs, alcohol, temper tantrums, violence, intelligence, malevolence, discipline and a lack thereof. For that reason, I have learned (the hard way!) to pay by results. In other words, if they want to screw up, they do so at their own expense!

But the moment a company looks vaguely as if it is to be sent to the graveyard, all sorts of people (lawyers, accountants, IPs and others) start salivating and want to pick over the bones to see what they can harvest from someone's broken hopes and dreams.

There will be a perfectly viable and legal way to rescue this situation without that unsightly feeding frenzy!

Per my post at 9:33 I didn't see the OP's further post clarifying there were no other creditors until I had replied.

 

[Lisa Thomas]

I recently had a customer put one of his companies into liquidation owing about £500K

There were just 3 creditors, being the 2 shareholder/directors and HMRC.

The debt to HMRC was £1. Which set me wondering whether the system was set up on the basis that HMRC couldn't possibly be zero? (Sorry, off topic, just a thought)

They may have been listed for £1 as an estimate just for voting status and to ensure they were marked as a creditor and would therefore receive all the paperwork relevant to the liquidation.

 

[SkylarPat92]

Is there a lease/tenamcy agreement between your property company and the Spa company? If so is rent being paid?

No formal/written agreement, but the Spa is making monthly rental payments

 

[SkylarPat92]

"Funnily" enough, another evening of missed appointments and group sessions.

This needs to end!
I am going to get an official offer, from my solicitor, for her 50% tomorrow and hand it to her.
It would be a case of "accept this offer or i'll call in my loan, which will lead to liquidation"
However, my worry is, is that classed as blackmail - sell or i'll sink the business...

 

[MikeJ]

No, that's not blackmail.

 

[Porky]

@SkylarPat92
1. Estimate what you think worst case scenario is if the business goes into liquidation. Talk to a quality professional such as @Lisa Thomas here. An IP can’t tell you it’s 40%, you need a proper valuation. But let’s say it’s in the region of £20k and you are not miles out. If she is not in a position to fund to buy £20k then you have little risk of counter offers for the assets and goodwill and know that’s circa worst case but it could turn out to be your cheapest option? Maybe? But it also comes with a different set of things to get done. Both you and your 50 % shareholder both have director obligations and it’s a process.

Also she can challenge a valuation with the IP she can challenge the IP to prove the valuation, they may need to seek a second valuation to avoid a legal case against them that they sold the assets too cheap or unfairly against creditors and this would add more cost, she can be plain bloody minded if she wants.

2. I still say be nice, I hear the counter points for that but my god last thing you need is someone turning bloody minded and making things even more difficult just to spite you. Don’t fight fire with fire. Seriously it’s in your interests to get it done nicely with less fuss and avoid any more possible brand damage.

3. If she is drawing money out the business each month she will see that as her entitlement. If it were me, based on the limited information I have on the financials, I would probably agree something for her share capital such as £10k and agree to pay her loan back over a set period of months you can afford going forwards.

4. If you paint a grim forward picture, if she has an ounce of intelligence she would realise it’s better to agree terms than lose the lot. If she came back initially with a silly price it means she would consider a sale. In talks you could say, my solicitors think your share is worth x, if it goes into liquidation I could buy the assets at Y and try and agree a reasonable settlement with her in the middle.

5. Your suggestion of handing her a solicitors letter with an accept or I will call in my loan, is not blackmail, it’s purely business BUT it is threatening in intent and sure to make her a total enemy of you yet you don’t know what’s going on in her personal life. She could call in her £15k loan. If she feels threatened she could make things really difficult. Don’t forget you are EQUAL owners, a decision you now regret but you foolishly agreed to that. That’s not a criticism of you, I have made a similar stupid error of judgement myself in the past but it’s where you now are. She has equal say and equal rights when it comes to signing this off.

Get a deal done to buy her shares, she signs the share transfer form, you pay her for them, close off her directorship and your nightmare with her is over, clean and simple you then own 100% of the capital and can focus 100% on the business. Bitter taste in mouth but she’s out your life - best option imo.

if you tried to go hard ball and did what you suggest to me or a friend I was advising frankly I would have you over, let you do your worst, appoint IP etc or let it drag on, not sign anything and when it comes to buying assets back bid against you and make your life pure hell to ensure you don’t benefit at my loss. Just saying. You need to really think about how you act. I totally stand by nice is better until as an absolute last last last resort nasty is the only option but I don’t know the characters involved here.

Good luck

 

[DontAsk]

yes

Are you sure