Vince Cable’s discussion paper released in July 2013 Company Ownership: Transparency & Trust is partly hoped to bring about the end of ‘dodgy directors’ and the ease which they trade in the UK.
Directors disputes with creditors are common place and some may be contrived but most are legitimate. At least that’s what Vince is hoping to achieve along with countering terrorism and money laundering which are far more serious issues it is imagined.
Having read the ‘paper’ Vince is right in that the vast majority of directors are decent hard working individuals and certainly that’s my own experience as I speak to many hundreds each year when trying to resolve their company debt problems.
Clarity around company ownership
Part of the ‘paper’ addresses the need for clarity around company ownership and control I’m sure this may exist for some larger companies and there may well be insolvent skulduggery involved of some nature. The vast majority of practical issues for businesses I see come from an ownership and control viewpoint are to do with 50/50 share ownership. In the beginning it may seem well intentioned in an effort to be ‘fair’ and each director’ being equal, but it is not practical and recipe for trouble. It is estimated that around 40% of all start-ups in the UK fail in the first twelve months and end in insolvent liquidation or dissolution. In the majority of cases the directors agree the way forward for the company but when there is a difference of opinion and equal say – this can cause all manner of issues. Of course these decisions are usually needed at the worst possible time when the company’s cash-flow is suffering or company debt is gathering making the business insolvent.
Agree who is the ultimate decision maker
The simplest solution to avoid becoming insolvent and ensuring you can pay your bills when due is of course to agree who is the ultimate decision maker and or what the disagreement resolution process is beforehand. You can do this by increasing the shareholding to one of the directors or to have a legally drawn up side agreement confirming the decision making process. Just a tip but keep the language simple so you can both understand it – if the lawyer is using 18th century language and none of the directors understand it go elsewhere there is no need for such convoluted language.
When you are going into business with those you know as friends it can often bring about the end of that relationship – reconcile yourself to this fact otherwise do not bother. There are the exceptions that prove the rule of course but in the main you will undoubtedly fall out at some point. Whatever the reason make sure you already have an agreed resolution process in place and think like Michael Corleone – it’s not personal.
As a useful tip if you cannot resolve the disagreement and one of the directors needs to resign then for heaven’s sake make sure the resigning director resigns at the bank too or this can have ramifications years later if the company becomes in solvent and ends in an unforeseen insolvent liquidation and the personal guarantees have been forgotten about but are ‘called in’ at the bank. When the bank does call in the bank’s personal guarantee it can have the effect of making the director personally insolvent too. This personal insolvency situation could have been easily avoided by taking a few precautions often years earlier.
Written by: Mike Smith