Stepping down as a director

[Pitman]

I’ve run a business with my business partner for the last ten years. It’s been very successful in that time and we’ve taken good money out of the business, but for the last couple of years revenue and profit have been down. We own the business 50/50.

Last month I decided that I didn’t want to continue my involvement with the business. I wasn’t enjoying the work, nor the fact that we were using the personally guaranteed overdraft as day to day cashflow. I was happy to crystallise my loss with the bank and step away. My business partner suggested I didn’t come to work from that day on, which seemed sensible.

My connections with the company are fourfold: 1) as an employee, 2) as a director, 3) as a 50% shareholder, 4) as a overdraft guarantor via a PG. The fourth one is the one that keeps me up at night.

Removing my PG is not straightforward, even though I’m willing to crystallise my position by a cash injection into the business to the tune of £100K. This is because the PG is joint and several and they prefer my security to my business partner’s. In total it’s £400K, although we’re not using all of it at the moment. I believe I could serve notice on it, but that would probably cause the bank to cancel the whole overdraft thereby immediately putting the company underwater. The best solution would be to get back into the black so that we could both tear up the overdraft, but that takes time and has no guarantees.

My business partner wants me to resign as a director and resign as an employee. Lawyers have advised me to do this at the same time that the PG is removed, but in the meantime my business partner needs to run everything past me as a fellow director. Neither of us want that. In a way I’m happy to resign as it feels fair, but I worry that I’ll become further away from the business while still being on the hook to the bank for the overdraft. Our FD, who’s great, suggested coming to an agreement that alerted me every time the overdraft breached a certain figure. I guess that would make me a little more comfortable.

He’s added these two points to a board meeting tomorrow. Can I be voted out as a director or is it something I have to agree to? Should I worry about resigning with the PG still in place?

That’s the thrust of the situation although there’s a ton more detail including compromise agreements, health of the business, termination period, a potentially difficult office move, announcement of my departure in the press etc, but I don’t think they’re pertinent to this immediate problem. Any advice greatly received.

 

[businessfunding]

My first question here would be will your departure set alarm bells at the bank, causing them to withdraw the overdraft?

Overall what is the direction of the business> If there is realistic growth potential it might be possible to replace the overdraft with a factoring arrangement secured by a single PG. (strongly advise against this with falling cashflow)

Alternatively, at your meeting agree a phased reduction in overdraft to allow you to exit cleanly.

You are apparently communicating well - do try to keep it that way!

 

[Pitman]

Thank you.

Potentially my departure could set off alarm bells with the bank. Depends on how it's framed and the prospects for the business. The bank have indicated that they'd probably secure an overdraft exclusively on my business partner, but they need to do a lot more checks first.

Today's issue for me is simply this: is it okay for me to resign as an employee and director or will this jeopardise my position?

 

[Chris Ashdown]

Once you resign your directorship you will have no say whatsever in the company and the remaining directors can do whatever they want to do, the same applies with your shareholding

Could you not transfer the overdraft to a loan that did not have you on as a guarantor

I doubt you could be removed as a director as you are in the strongest positions able to block and such action and anyway, Believe they would have to call a boardroom meeting giving you 28 days notice of the agenda and meeting (not absolutly sure of the meeting timings)

My suggestion is to remove as much overdraft as possible over next 12 months by whatever means and pass a resolution that the overdraft must be reduced at the end of every month and not allowed to exceed the previous months figure. Keep your own money to yourself it's the company which must sort it out and with you onboard to keep pushing and working it should do better

Another possibility is to cut staff and directors wages or at least Directors

 

[Pitman]

Thanks Chris. I don't think anyone would loan the company £100K at the moment.

I think you're right. The other two members are advisory board so I don't think they can remove me. I don't think they would anyway. The overdraft comes up for renewal in September, so I think it's best that I keep everything as it is until then. When the PG comes off, I step down as a director and employee. Does that sound fair and sensible?

I'm not drawing a salary. Other cost-cutting measures are being made.

 

[Chris Ashdown]

Yes its up th the FD to get it down to managable limits so as long as they all understand the picture, we have been through a very tough time and it was suprising what cut backs and stock removal we managed without major effect to the company operations, but far improved cash flow

 

[Pitman]

Just finished a board call.

The consensus was that I should resign as an employee. I'm not showing up at work, I'm not being paid, I'm not contributing to the business. I'm really not an employee. Additionally, it causes some confusion in the business with the staff and clients. It would be more helpful to the business to say that I didn't work there any more.

I don't think resigning as an employee reduces my visibility and control of the business if I still have a director position. Is it safe for me to resign? It feels like it's the fair thing to do.

 

[Suzuki]

I think you really need to step away from the internet and go get professional advice.

There is very little point in asking us on here if you should resign or what you should do, for two major reasons. One is we don't have all the facts which you clearly can't post publicly. And for the amount of money you're talking, it would be silly to just guess what to do next or rush into something without speaking to a pro...

 

[Pitman]

Thanks Suzuki. Their professional opinion is to remain a director, but that isn't enough to make my business partner happy. I think it's going to come down to a gut call. I'll work it out

 

[The Resolver]

Do not resign as a director because you instantly lose all right of access to financial and trading information. All in law you are then entitled to is the annual accounts which is too little information delivered too late. This will severely prejudice not only your exposure on the PG but your ability to negotiate a sale of your shares at a fair price.

Do not resign as an employee until such time as you are 100% aware of all relevant provisions in the Articles of Association and any Shareholders Agreement (is there one?) to ensure, for example, you are not required to then resign your directorship and/or offer up your shares under some fixed valuation methodology.

I deal daily with sorting out these shareholder stalemates through either mediation ( instructed by the company) or negotiation strategy design for one shareholder. The first step is to ensure you all understand the options and the risks and outcomes of each. Information is also key so withdrawal before a deal is done is usually inadvisable. But it can be done on a controlled basis and ensuring you call regular monthly board meetings and use them. You should at least insist on regular reporting and retaining access to all records so everybody is on the same page at all times.

You clearly have to keep your sights focused on the overdraft. You say cost cutting measures are being put in place. It would be sensible to draw up an agreement as an extension to the Shareholders Agreement , or if none this to be your Shareholders Agreement, that apart from the sort of provisions one might normally include, such as deadlock clauses to ensure decision making progresses ( see my shareholder agreement page at www.boardroomresolve.com ) will include provisions over decision making in overhead reduction and overdraft control.

Call me if you want to talk further in more detail than shoud be put ona public platform.

 

[The Resolver]

...and to add the point that as your business partner is not happy about you retaining your directorship then think about an agreement whereby you do resign but in turn are given contractual rights of access to information personally guaranteed and clear contractually binding commitments by your co-shareholder over expense control. This might also include security for you over assets of your co-shareholder in the event the PG is enforced against you. This may make him more careful over the overdraft than he might be thinking the Bank are only interested in your exposure notwithstanding the security they have over him.

Another possibility is for you not to resign but appoint an alternate director under instructions to just attend meetings on your behalf to ask for and acquire information but not vote.

If there is IP in the company which is key to its trading but which is difficult to value ( and therefore more flexibility in valuing should creditors in a later insolvency challenge such a deal)then you might consider acquiring it under a licence back to the company.

In short there are all sorts of deals that can be put together that protect you whilst giving your co-shareholder what he seeks.But these must be put down in an agreement

 

[Alan R Price]

More great advice from Graham there!

 

[Pitman]

I'll do a quick follow up in case anyone googles for it.

The majority of the legal advice was "you'd be nuts to resign while your personal guarantee is still in place". In practice, resigning as an employee felt fine. As Graham points out, I needed to check that my employment contract, shareholder agreement and articles of association don't have any clause in it that says "if you resign as an employee you must sell your shares and resign as director". In my case it didn't.

By stepping down as an employee my director status goes from Executive Director to Non-Exec Director. As I understand it, the difference is that I'm not drawing a salary and I'm not regularly turning up for work. I still attend board meetings, vote and have sight of what's happening in the company.

In time, I'm probably going to tender my resignation as director. This is the potentially scary part as I'll have less visibility and control on what's going on in the business while I still have a personal guarantee in place. The issue my business partner has is that he's putting time, energy and money into something that he doesn't have control over and doesn't have the majority shareholding. It hampers his ability to make a success of the business, which is against my best interests. As a director, I also have responsibilities that I would prefer not to have: dealing with the company should it fold, not being able to do anything that is deemed competitive.

So I have to weigh up my risks: is it better to have control and visibility of the company while my PG is in place or is it better to take actions that give it a better chance of success, thereby reducing the debt to the bank? The risk is real, but mitigated somewhat by a board whose duty it is to do the right thing and a set of UK laws that prevent things like embezzlement. I'll feel the water in fortnightly board calls and then step down when I'm comfortable. My business partner suggested making himself a chairperson which I understand gives him the deciding vote in a 2-2 stalemate.

My discussions with legal professionals has been an eye opener. I spent time with lawyers who start the clock with your first sentence and make sure the credit card clears at the end. Their help wasn't that useful. Far better was Sam Mabon (commercial) and Marcus DeFelice (employment) at Brabners who were more pragmatic and were happy to have a friendly chat. Same for Graham Ross (below) who was happy to spend 20 minutes advising me on the phone.

 

[Alan R Price]

Just remember that even if you are a non-exec you have the same duty as all the other directors to keep yourself informed of the company's financial position and to act in the best interests of creditors and shareholders; so insist on seeing management accounts and attending board meetings frequently/regularly. If you failed to do this and the company were to become insolvent you would be equally in the firing line with the paid directors.