Repaying ex-director issues

[little-malcolm]

We bought back the shares of a director several months ago. She returned her shares to us and agreed to be paid back her initial investment in monthly instalments in exchange - we all signed a heads of terms document stating this. Recently cash flow issues have forced us to delay payments to her and she is now threatening legal action against the company, despite us endeavouring to get back up to speed with the payment schedule asap and advising her of this.

We have calculated it would be far more sustainable for the business if we pay her back at a lower monthly rate. I suspect this suggestion will be met with more threats, but what I wanted to know was if we're allowed to alter the terms of the original agreement in regard to the amount she receives from us every month? My fear is that if we are forced to sustain the current rate there may not be a business at all.

I'd be very grateful for any insights or advice.

Many thanks.

Malcolm

 

[Scalloway]

Give her the option, the full amount in reduced amounts or what she can get from the liquidation.

 

[weblisterltd.com]

I agree, all very well she wants her money as you have made an agreement, further to this if you were to wind up she would have much less, I would think that she could enforce her agreement though so be careful, no way of borrowing funds or selling an unneeded asset?

 

[Free Lance]

Who is buying back the shares, the Company or the other shareholders? It makes a difference as the Company cannot pay for the shares be bought back in instalments and, if the company has no profits from which to buy back the shares then there is quite an involved procedure to properly carry out the share buyback involving notification to creditors, valuations, etc.

 

[little-malcolm]

Thanks for all the responses. To answer the questions:

The other shareholders (3 of us) bought back the shares and they were actually transferred back to us immediately - even before the first installment was paid. The heads of terms agreement was then signed by all 4 of us.

Ultimately what I need to know I suppose is whether or not we are allowed to lower the monthly repayments? Could we be forced to pay back at the original agreed rate or is it enough that we are at least paying back something?

 

[Free Lance]

Thanks for the clarification. The simple answer is that you each personally have a contract with the outgoing director in relation to the share purchase.

Unless you built in terms saying something like, "payments are x unless the company is performing below expectations when payment is y," then she can enforce each contract against you personally for the full amount. It is irrelevant whether the company is doing well or not. It is irrelevant even whether the company is in insolvent liquidation - the contract still remains with you personally.

Was the contract professionally drafted? It may even be worse for you if you are each jointly and severally liable for the sale price as she could go against any one of you for the full purchase price, not just that buyer's proportion.

Ultimately though, if each of the buying shareholder's personal wealth is wrapped up in the success of the company then you have a good footing to negotiate reduced payment terms with her but she does not have to do so and could hold you to the precise terms of the contract if she wanted to.

Not what you wanted to hear I know. You might need to sweeten the request to reduce payment by, for example, increasing the overall amount. Get it documented professionally and perhaps then build in a mechanism to relate the price to the success of the company. If I were her though I would say no - just pay me at the reduced rate but I can enforce the whole amount against you if I change my mind.

 

[little-malcolm]

Hi,

Yes it was professionally drafted and is related to the health of the business as opposed to each of us individually. So if she rejects the proposal what would her likely route be? Small claims court? I was hoping if we were still making payments - albeit at a lower rate - that may negate the legal process?

Many thanks

 

[Free Lance]

If the reduced payments are beyond that allowed by the agreement then she can still sue as you the buyers are in breach of contract. Of course, by paying her something you are minimising her loss - she cannot claim for more than her actual losses (plus interest and costs).

 

[little-malcolm]

There's nothing in the agreement which states whether we can alter the payment or not. We can pay her the full amount but over a longer period of time. I suppose we'll have to make the offer and judge the reaction. Thanks for your advice.

 

[Bob]

We haven't seen the agreement. However as it seems to be for the sale of the shares from the departing director to the remaining directors, it appears that the agreement is not with the company. It would normally be with the remaining directors for the shares that have been transferred to them. If that is the case, it seems strange that she is threatening to commence legal action against the company. Her course of action would be to proceed against all of the directors individually for the amount due from that director

 

[little-malcolm]

Hi. The company is actually mentioned as the final party that the agreement is with, but I appreciate it's difficult to fully comment without having seen the agreement in full. I suspect we may have sit down with the lawyer that created the agreement for us - which is a little counter-intuitive considering the cost of doing so! Many thanks anyway.

 

[Free Lance]

There is a disconnect somewhere here. The directors bought the shares but the agreement to do so was with the company. The stock transfer forms will have had the consideration included on them and I would still say that the directors are likely to be personally liable (either to pay the price or procure that the company pays the price).

It might be messy but at some point it will unravel in her favour I would say. Negotiate reduced payments (perhaps using the fact that the Company is a 'party' to assist) and then properly document it then.