Partner wants to leave limited company

[Philsy]

Hi, I’d appreciate some advice please.

I run a limited company with a friend. We are both directors and equal shareholders.

The friend recently announced out of the blue that’s he’s leaving to pursue a passion. While I’d rather he’d discussed this with me first, I understand his reasoning and am supportive of him, and he’s working hard to ensure a smooth transition.

However, the company has debts, albeit manageable ones, and I have put my own money into it, whereas he hasn’t.

I have suggested that it’s only reasonable that he takes on a proportion of the debt, and also to remain as director and shareholder. I feel this means he retains a responsibility for the debt.

He has also suggested he may return to the business in a few years to allow me to retire (he’s younger than me). So it seems fair to me to let him retain a connection.

However, he is adamant he won’t take on the debt nor remain part of the business.

I feel this is unfair and wrong for him to simply walk away and absolve himself from the responsibility of the debt.

Sadly, we don’t have a partnership agreement.

So, in a nutshell, can he legally or, indeed, morally just walk away from the business and leave me to cope with the debt alone?

We are both keen to keep this amicable.

Many thanks for reading.

 

[fisicx]

Talk to the @The Resolver. This is what he does.

Even if he does resign as director he can still retain his shares and get a dividend each year. You do all the work and they get half the money.

 

[Philsy]

Talk to the @The Resolver. This is what he does.

Even if he does resign as director he can still retain his shares and get a dividend each year. You do all the work and they get half the money.

Thanks for the reply. It’s the liability for the debt which really concerns me.

 

[fisicx]

Thanks for the reply. It’s the liability for the debt which really concerns me.

The liability for the debt rests with the company. If your partner resigns as a director the liability still rests with the company. You as the sole director are responsible for ensuring the debt is repaid. The loan you made to the company is a separate issue.

If the partner wants to return and take over the company, they then take over the debt.

 

[Newchodge]

You cannot prevent him resigning as a director. The company, and only the company, is responsible for the debt. Even if he were to agree to remain as a director he would not then be responsible for the debt. UNLESS he (or you) has signed a personal guarantee. If he has signed a personal guarantee he is and remains responsible for the ebt to which the guarantee relates.

For others reading this thread, PLEASE get a shareholders' agreement sorted before you start.

 

[Philsy]

Thanks for the replies, which are helpful.

I guess there is the legal issue, which seems clear cut, but also the moral one. As a friend, he’s walking away from the situation scott free. I put my own money into the business, whereas he hasn’t. In hindsight, an agreement would have made sense…

 

[Newchodge]

Thanks for the replies, which are helpful.

I guess there is the legal issue, which seems clear cut, but also the moral one. As a friend, he’s walking away from the situation scott free. I put my own money into the business, whereas he hasn’t. In hindsight, an agreement would have made sense…

I am afraid it is all but impossible to enforce a moral issue in business

 

[fisicx]

@Philsy - also important to note that shares are independent of being a director. They can resign as a director and retain their shares. Which mean they will continue to receive dividends.

You can take out the money you invested as a directors loan once your partner has resigned.

 

[cjd]

He will own half the company in perpetuity if you don't sort this out now and there's really very little you can do about it without his agreement. Ideally he'll return the shares or sell them to you but if you can't reach agreement even with help of someone like the Resolver (who does this for a living) you might have to wind up the company and start again. If you don't and the company succeeds your ex-partner will get half of it and half any dividend payments for nothing.

 

[Mark T Jones]

Reflecting the above

@The Resolver is definitely the man to help you. However you may be a bit cloudy on some definitions / rights /responsibilities


The company is an entity in its own rights. It has debts, one of which is to you.

As directors you may have signed guarantees on those debts (if you aren't sure, check it now). Resigning as a director won't get them off the hook for PGs

Directors have responsibilities. You can't prevent them from resigning as a director, but they will still be responsible for actions up to the point of resignations.

Shareholders have rights. Without a shareholder agreement you can't make them relinquish their shares. You can 'kind of' prevent it, simply by refusing to buy them back. They are worthless to anyone else.

The rest is discussion and negotiation

 

[Lisa Thomas]

Unfortunately if you have loaned or gifted the company your personal money without any security, it's simply that.

Your fellow director is under no obligation to pay for the company's liabilities umless they have given personal guarantees to those creditors.

How were the monies you advanced treated - as a directors loan or as a share purchase?

If a DLA, then the company can pay you back if/when it can afford it.

If the company is insolvent, which it might be based on your comments that it has debts it cannot pay, then you should take professional advice from an Insolvency Practitioner.

 

[MyAccountantOnline]

Thanks for the replies, which are helpful.

I guess there is the legal issue, which seems clear cut, but also the moral one. As a friend, he’s walking away from the situation scott free. I put my own money into the business, whereas he hasn’t. In hindsight, an agreement would have made sense…

I do have sympathy for you.

Sadly as an accountant I see this so often with friends and family going into business together.

Yes you should have got a shareholders agreement in place but you really aren't the first person not to have done so.

Do try and discuss this with your friend and reach an amicable solution.

 

[Gettingthereslowly]

Take a step back - is this a golden opportunity - look forward a few years.

Is the business viable now/profitable?
Can you cope without your partner?
Can you buy in their services (cheaper)?
If your partner walks away, are they expecting payment for their shares?
How big is the debt (compared to the profits of the company)?
- this could be a way of you getting 100% of the company, free or very cheap

I'd ignore the suggestion of them taking back over in a few years time: you need to focus on you, here, now and the future you can forge yourself.

 

[Philsy]

Thank you so much for the many informative, thoughtful and kinds replies. They have been very useful.

We had a good chat today and the crucial thing for both of us is to remain friends, as we are very close. I think we are going to go with his plan of resigning as director and relinquishing his shares, no money will change hands. He’s then going to keep in touch occasionally to help out and offer advise on an informal and friendly basis, as he remains very passionate about the business and is keen to see it continue to succeed and for me to benefit. If he does return in the future, he understands that he’ll have to buy shares.

Thanks again, this is a great resource, I shall use it more!

Phil

 

[cjd]

Well done!

But PLEASE get the share give-back done formally by a commercial solicitor - everything signed and sealed so there's no future claims. Best way to stay friends ;-)

 

[Philsy]

Well done!

But PLEASE get the share give-back done formally by a commercial solicitor - everything signed and sealed so there's no future claims. Best way to stay friends ;-)

Thanks, will do!

 

[Lisa Thomas]

Surprised he's agreed to relinquish his shares.

 

[The Resolver]

If I was to advise the other person, it would be to have an Agreement giving him the right to take back his shares in the future..Obviously its in your interests not to be committed in that way so have him sell to you / the company the shares ASAP. Normally you would have a full Sale and Purchase Agreement with indemnities/waivers/warranties etc and clarification on certain issues such as past interim dividends. One I am drafting this week has over 8 pages but can be much longer. So despite the trust he has put in you as to taking back the shares in the future, once a proper SPA is given with all its legal language he is likely to then immediately consult a lawyer on the document who would likely persuade him to negotiate a better exit. (with at least a forumla for paying to buy back the shares in the future) . So you may consider a shorter route in which you just ask him to send an email resigning and ask him to sign the one page Stock Transfer Form. He is then totally reliant on your unwritten promise to let him have the shares back in the future and you havnlt had to pay to buy the shares,.

Can't believe I have actually advised to NOT have a full SPA! But sometimes business needs and pragmatism take precedence

By the way check if the company is run under the Model Articles. If so they need changing slightly to ensure the decisions you take in future as a sole Direcor are binding in law. See my page on this at https://www.mr2percent.com/ scrolling down to the Stop Press item.

 

[DontAsk]

Even if he kept the shares you don't have to pay any dividends, thus he gets nothing.

Keep the money in the company or use it to repay your directors loan, pay yourself a higher salary, pay into your pension, etc., .... It might not be as tax efficient but it's still potentially better than handing the money to him.