What should happen when two directors who are 50/50 shareholders in a business disagree over whether or not they wish to run their company anymore?
When two directors who are 50/50 shareholders in a business come to the mutual decision that they do not wish to run their company anymore for whatever reason, they can enter into a process called a Members’ Voluntary Liquidation (MVL), in which a solvent business can close down and have its surplus funds distributed among its shareholders. This is a straightforward process that is useful for directors who want to go back into work as an employee, step down from a family business, move abroad or simply retire.
Shutting down a company is not always this simple, however, such as in the case of director disputes, in which two directors with equal shares in a business remain in disagreement about whether or not to go into liquidation. Although it is possible that just one of the directors can step down from their position if they wish not to be involved in the business any longer, some directors may instead strive to liquidate the company to take care of any outstanding liabilities. If the other director does not agree to this, then the business is left in a state of deadlock. This is a thorny situation that no director would want to find themselves in, but should such a dispute ever arise, it is crucial to understand what resolutions are possible.
Just and Equitable Winding-Up Petition
One method of ending a deadlock between disputing directors is to petition to wind up a company on what is referred to as ‘just and equitable grounds’ under insolvency legislation in the UK. A company director is able to present a winding-up petition on just and equitable grounds if a mutual decision to liquidate a company cannot be reached among its shareholders. This petition must be approved by the court, who will assess whether or not there has been a breakdown of mutual trust and confidence between the directors, what other possibilities exist, and if shutting down the business is ultimately the best course of action. It is not often that this solution comes to pass, however, as if the court comes to the conclusion that another route is doable, it will likely favour that one over winding up the business.
Buying Out a Director’s Shares
Another possible resolution involves one of the directors buying the other’s shares in the company. Typically, this would involve the business’ accountant ascertaining the value of the shares of the director who is looking to leave the company and provide their advice on an appropriate price. In the case that the disputing directors are a married couple who have entered divorce proceedings, the court may rule in favour of a limited company divorce settlement, which would involve the director who wants to close down the company selling their shares to their former partner, who would then go on to run the business as its sole owner.
If your business is currently in a bind due to disputes between its directors and you want to know more about what is best for your business, contact Voscap today at 020 7769 6831 or email team@voscap.co.uk to speak to one of our business recovery specialists.
