Posted by familylaw on 29th May 2024
What happens to a limited company when 50:50 directors separate?

If two limited company directors with equal shareholdings decide to separate and no shareholders’ agreement is in place, it can cause serious problems if they don’t agree on how to proceed.

Perhaps conflict seemed unthinkable when they first set up their business, but as time passes life events and the general stresses and strains of running a company can take their toll, especially if the directors are also life partners.

When 50:50 directors separate

If no shareholders’ agreement was made on the formation of the company, any disputes between directors with equal shares can lead to a prolonged deadlock. This may become very damaging for the business and its reputation if animosity seeps into its day-to-day running.

Although the company’s Articles of Association could offer guidance on resolving director disputes in general, the lack of a casting vote in this situation can be problematic. If the dispute continues for too long it’ll seriously hinder the company’s progress and even result in frozen bank accounts if the bank becomes aware of the issue.

So what are the potential options for resolving this challenging situation?

Using solvent liquidation to move on after separation

Members’ Voluntary Liquidation (MVL) closes down the business and distributes the profits to directors according to their shareholding. If both directors are agreeable to entering this formal procedure, it can bring the dispute to an end fairly and allow them to move forward.

As part of the process, company assets are professionally valued and sold at auction, and a another significant benefit of MVL is its tax efficiency. Distributions are subject to Capital Gains Tax (CGT) rather than income tax, and further tax relief may be available to the directors if they’re eligible.

What happens if one director doesn’t want to liquidate the business?

If one of the directors doesn’t agree to liquidate the company on separation, professional mediation may offer more options. These could include one director buying out the other, for example, or separating the business into two smaller entities so that each director owns a part of the original company.

In this case, the business will be professionally valued and if one element of the demerger is deemed more valuable than the other, one director may need to pay an additional sum that reflects this.

If the matter still cannot be resolved through mediation, the company or the shareholders may present a winding-up petition in court on just and equitable grounds.

What is a just and equitable winding-up petition?

Petitioning for a court order on just and equitable grounds places the decision for what happens next in the hands of the court. Although not an ideal solution under normal circumstances, if mediation and negotiation haven’t worked, this route breaks the deadlock and allows the shareholders to separate.

The court will expect the directors to seek mediation before they present a petition, however. Depending on the circumstances of the case their decision may be to place the company into voluntary liquidation. Alternatively, one of the resolutions mentioned above may be deemed more appropriate.

Avoiding deadlock in a director dispute

Avoiding the potential for a deadlock to occur between directors with equal shares is crucial. Being unable to move on can be crippling for a business so a shareholders’ agreement put in place when a company is formed is one of the best ways to prevent this possibility.

It also encourages two directors with equal shareholdings to think about the types of disputes that might arise in the future and how they’ll deal with them. Prevention is definitely better than cure in this case and would allow directors to separate with more ease.

About the author – Jon Munnery is an insolvency and company restructuring expert at UK Liquidators (part of the Begbies Traynor Group), a leading provider of company liquidation services to both solvent and insolvent limited companies

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