Running a business can be challenging, and sometimes directors may disagree on the best way forward. Director disputes can occur for many reasons and can lead to a slowdown in decision making. While this can be inconvenient during normal operations, if directors cannot agree on what to do when the company is insolvent, it can lead to more severe consequences.

How can a director dispute affect a company?

The effects of a director dispute can depend on the division of shares between the disagreeing directors.

If, for example, a company has two directors with the shares split between them; one wishes to liquidate the insolvent company and start afresh in a new one, while the other wants to continue the company in its current form, such a scenario can create a ‘deadlock’ until either a compromise is reached, or one party backs down.

While deadlocks can be cumbersome to navigate when the company is solvent, if it’s insolvent, the consequences can be severe if nothing is done to break it. Not tackling the insolvency because the directors cannot agree on a way forward can result in creditors petitioning to wind-up the company.

Can a liquidation go ahead in a director dispute?

A liquidation, or other insolvency arrangements, may not be able to go ahead if there is more than one director holding shares and there is a dispute as to how to proceed.

Director dispute resolution

A lack of understanding of the available options might contribute to a director’s reluctance in deciding the next course of action for the company. If you and a fellow director cannot agree on the direction to take an insolvent company, speak to us. We are a licensed and regulated insolvency practice with years of experience in dealing with insolvent businesses. Our initial advice team can offer free, impartial, and non-obligatory advice, guiding you through the available processes and clearing up any misconceptions.

If the deadlock cannot be resolved, a winding-up petition can be presented to the court on “just and equitable grounds”. The courts decide the next step, consider if the mutual trust and confidence between directors have broken down, and whether to liquidate the company. While this process isn’t often enacted, it can be useful where there is no other option or if personal matters have affected the business.

How we can help

Once the directors agree to liquidate a company, the type of liquidation it will undergo will largely depend on its solvent position.

1. Speak with our initial advisers through phone or online chat.
2. After the initial assessment, we will identify whether liquidation is viable for the company.
3. We will propose the company’s liquidation and undertake the necessary steps.

Closing via an insolvent voluntary liquidation

If the company is insolvent and repaying its debts isn’t an option, directors should consider liquidating the company voluntarily before the creditors force it into compulsory liquidation. The procedure to close an insolvent company is a Creditors Voluntary Liquidation (CVL), which has several advantages:

• Allows the company to close in a structured, orderly manner.
• Stops creditor pressure for the duration.
• The debts die with the insolvent limited company, leaving the directors free to start again following the closure.
• Employees can claim redundancy pay from the Redundancy Payments Office.
• Allows the directors to close the insolvent limited company, ending its debts and any associated creditor pressure, allowing for a fresh start.

Closing via a solvent voluntary liquidation

Sometimes directors may wish to close a company because they feel it’s reached the end of its useful life, the directors want to retire, or not wish to continue the business in its current form. Rather than striking off through a dissolution, the directors can close the company via a Members Voluntary Liquidation (MVL). This solvent liquidation process allows the directors to move on from the business and potentially claim Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if the company has more than £25,000 in assets.

In some circumstances, an MVL can be used to restructure, split, or partition a company. Doing so can be useful if the directors wish to part ways and divide their operations into separate entities. The process is called Section 110, after the section of the Insolvency Act, 1986, and is sometimes referred to as a ‘demerger’. It can be complex, so speak to us for more information and free, impartial advice.

Alternative Options

Other insolvency arrangements may be available depending on the company’s situation, and liquidation might not be the best option.

• Repaying via a formal repayment arrangement
  Depending on the debt’s volume, the company may be able to repay it at an affordable rate on a monthly basis. The company can do this through a Company Voluntary Arrangement (CVA), a formal repayment arrangement tailored to what the company can afford. The arrangement usually lasts five years, and once concluded, the remaining unpaid balance is written off.
  More information on CVAs
• Restructuring via administration
  If repaying isn’t an option or the company needs more substantial restructuring to alleviate the debts, we can explore administration as an option. Administration involves a licensed insolvency practitioner taking control of the business, implementing the necessary changes to make it appealing to potential buyers. All creditor pressure is frozen for the duration.
  More on administration

In summary

A deadlock as the result of a director dispute can cause issues when the company is solvent. Failing to agree on how to take things forward in insolvency can have severe consequences. Formal insolvency processes such as liquidation cannot go ahead without a large portion of the shareholders agreeing, which can be problematic if the disagreeing directors have a 50/50 share in the company. The longer directors leave it to act, the fewer options will be available, making the creditors more likely to instigate a winding-up petition. Speak to us for a breakdown of the available options and free, impartial, non-obligatory advice tailored to your circumstances.

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