Leaving family to run business whilst retiring and liability

[NFT]

What are the responsibilities and liability ramifications of just leaving people you make management of office/directors (friends/adult kids) to it and it going wrong..

I.e They verbally offend, abuse or sexually harass staff, bring in and/or promote their friends, back friend up committing fraud on customers to cover their own failings/friends failure/fraud, abandon complaints sent to them as director for resolution then on pursuits/legal letter stupidly assert unknowns as fact trusting friend/think customer pulling a fast one angrily lie on phone/email/letter asserting all kids of things as facts customer can prove otherwise causing litigation going in customers/clients/contractors favor.

Would the retired Directors that still own the company through 100% share ownership via another company, who put the family/person in their position/directorship be looking at litigation under a claim their child wasn't fit and proper to be a director or a failure in stewardship of successors occurred??

And what would be good to put in place to prevent this, such as any agreements, hiring a person to watch over them and report back to ensure successors are fit and proper in their daily work and dealing with customer issues given to them to resolve as directors.

Many Thanks for any helpful insights.

Edited by NFT on Tuesday 5th December 16:57

[UrbanAchiever]

Sounds like your family members aren't the best people to leave in charge if you're concerned about them doing all of that. Unless you've already left them in charge and that's what's happened....in which case sack them for gross misconduct.

[GiantEnemyCrab]

Obviously, but that doesn't help the OP

[NorthDave]

It's an interesting question OP.

I hope someone who is way more qualified will comment but I wonder if you stood down as a director your liability would end. I think you could still retain the shareholding without being a director.

[Eric Mc]

NFT said:

What are the responsibilities and liability ramifications of just leaving people you make management of office/directors (friends/adult kids) to it and it going wrong..

I.e They verbally offend, abuse or sexually harass staff, bring in and/or promote their friends, back friend up committing fraud on customers to cover their own failings/friends failure/fraud, abandon complaints sent to them as director for resolution then on pursuits/legal letter stupidly assert unknowns as fact trusting friend/think customer pulling a fast one angrily lie on phone/email/letter asserting all kids of things as facts customer can prove otherwise causing litigation going in customers/clients/contractors favor.

Would the retired Directors that still own the company through 100% share ownership via another company, who put the family/person in their position/directorship be looking at litigation under a claim their child wasn't fit and proper to be a director or a failure in stewardship of successors occurred??

And what would be good to put in place to prevent this, such as any agreements, hiring a person to watch over them and report back to ensure successors are fit and proper in their daily work and dealing with customer issues given to them to resolve as directors.

Many Thanks for any helpful insights.

Edited by NFT on Tuesday 5th December 16:57

Directors are ultimately responsible for a company. If they have hired the wrong people, they need to take the appropriate action.

[NFT]

Thanks so far guys,

Not my business that did all that, I am considering letting mine be directors as I step back which is why I asked etc..

But it is based on a concern from one I know who is being taken to court and I am now considering chasing, after being utterly perplexed by the indifferences stated to myself by their director son on chasing a matter, his aggression and confidence left me unable to discern fact from fiction before finding myself believing what he said due to the aggressive confidence.

I know the parents owned and ran the business, formed another that bought all the shares and they prepare group accounts, I am certain the parents expected this to protect them but I expect since son committed fraud, also personally in asserting opinions as fact as the party passed it to resolve before legal action, that parents should also have some liability as they never stewarded kids into decent, fit professionals that follow practices, deal with matters sensitively and express opinions as that, not aggressively forced facts whilst barking at customers. etc..

Used to think highly of the parents, but found kids have caused harassment cases, committed fraud, malicious communications and tbh it wasn't hard to see the loud mouth aggressive kids would do as they have if left in control of it without proper supervision.

I expect that it may be complex, but parents could be held to account in some way for not stewarding and overseeing them properly?

Which is why I am keen not to allow opportunity for my situation to go so badly.

[Ean218]

It's really quite simple, the directors have a fiduciary responsibility to various parties, especially the shareholders who appointed them to run the business.

However if a director does something which ends up with him being personally liable that is not anything to do, directly, with the shareholders and no liability transfers to them, presuming they are not also directors. However it may cost the company a pretty penny to sort out issues like this, that is the hit taken by the shareholders.

[Panamax]

Ean218 said:

that is not anything to do, directly, with the shareholders and no liability transfers to them, presuming they are not also directors.

In the situation outlined it may not be that simple. That's because of the concept of "shadow directors". Basically if there are people in the background pulling the strings then they can have the same responsibilities and liabilities as formally appointed directors.

Link here, https://www.thecorporategovernanceinstitute.com/in...

[NFT]

Thanks guys,

With regards to shadow director it appears the other business may be doing so.

The parents incorporated a new business, made themselves directors, bought the shares and assets from first business, started renting assets to the business with their son taking position of director in first company, and shortly after they removed themselves, except of one being secretary.

Interestingly father still turned up in the office, did jobs for the business, drove vehicles with the company name on them, had uniformed staff at his hobbyist business and was still known as the Gaffa by some staff at least for a period.

Is my belief owner directors have a liability for people they hire and esp. appointment of family as directors correct?

Is there not such a thing as stewardship offences, esp. for family businesses? So they must ensure the kids are professionally embodied, honor guarantees business is won by offering, continue to deliver the quality of service to customers good relationships have been built with beforehand, and ensure quality of product/work remains consistent ensuring the son is competent and of diligent, good faith conduct.

[StevieBee]

NFT said:

Is my belief owner directors have a liability for people they hire and esp. appointment of family as directors correct?

Is there not such a thing as stewardship offences, esp. for family businesses? So they must ensure the kids are professionally embodied, honor guarantees business is won by offering, continue to deliver the quality of service to customers good relationships have been built with beforehand, and ensure quality of product/work remains consistent ensuring the son is competent and of diligent, good faith conduct.

It is up to the owners to ensure that those they have put in charge of management and operations are capable of doing so to the required level of skill and that they undertake their duties to the level of quality needed.

The fact that there are family members involved is irrelevant. The law does not provide any distinction between an employee who is a relative and one who is not and nor does it provide any additional protection (such as Stewardship Offences..... there is no such thing). Even nepotism isn't illegal except in cases where nepotism results in discrimination.

The Directors of a business are jointly and severally liable for it regardless of the role they play in its day-to-day operations. There exists no protection for them for the actions of those the company employs or the actions of other Directors; family or otherwise, other than that afforded by Ltd status. The only way a Director may absolve themselves of liability and responsibility is if they resign as a Director. They may still be retained as an employee and remain as an investor. However, they remain permanently liable for anything that occurred during their tenure as a Director. This seems to impact on this situation:

NFT said:

Thanks so far guys,
I know the parents owned and ran the business, formed another that bought all the shares and they prepare group accounts, I am certain the parents expected this to protect them but I expect since son committed fraud

If they were Directors when the fraud took place (regardless of their involvement in the business), they would be liable for prosecution, as would the son, obviously. He would be charged for the actual fraud. They would be charged for either enabling the fraud to take place or - more likely - failing to prevent it (a dereliction of their legal Directorial responsibilities). For them, the potential consequence would be a hefty fine and disqualification from being a Director for a period of several years, possibly permanently if the fraud was significant. This is the potential situation. A good defence solicitor may well be able to argue against this but the point is that a Solicitor would be required because there is no existing legal protection for the Parents against the actions of their Son in this scenario.

Edited by StevieBee on Wednesday 6th December 06:18

[dave123456]

I’d say a good exec chairman is essential here, looking after the families interests and with a clearly communicated exec remit.

[akirk]

I would say that it is relatively simple to understand even though there are some complexities:

- Directors hold responsibility
- Shareholders do not (would all shareholders of BP be held jointly responsible for an oil spillage? - no).
- Once the parents have retired and are no longer directors, then their responsibility stops.
- Owning the shares / renting a building to the business etc. doesn't of itself technically give responsibility - but it might be categorised in a way which does (e.g. controlling a company's building can classify you as a PSC)

However - as mentioned, any influence or role still in the business will lead to easily proven allegations of shadow director, or PSC (person of significant control) and therefore liability may continue... A PSC is defined in a range of ways, but owning over 25% of the shares is included... You might think that having that held remotely through another company would change that but it doesn't:

Government says said:

Where a trust or firm would satisfy one of the first four conditions if it were an individual. Any individual holding the right to exercise, or actually exercising, significant influence or control over the activities of that trust or firm.

and

Government says said:

Conditions (i) to (iii) might be met directly or indirectly. A condition is met indirectly where an individual holds their rights through, for example, another company.

So if the holding company holds more than 25% of the shares in the active company and the retired directors hold more than 25% of the shares in the holding company then they are PSC and must be registered as such with Companies House.

It is worth noting:

Government says said:

Failure to provide accurate information on the PSC register and failure to comply with notices requiring someone to provide information are criminal offences, and may result in a fine and or a prison sentence of up to two years.

The concepts of Shadow Director and PSC are not the same - the reasoning behind understanding a PSC is about transparency and who owns a business, understanding ref. Shadow Directors is about understanding who pulls the strings - and making sure that they are held accountable. However, the description above about being still involved etc. would suggest Shadow Director.

There is also another category of 'De Facto Director' which is where someone is acting as director without being appointed formally - generally tends to be an employee who has stepped up, e.g. someone in finance sorting out the accounts and filing on behalf of the company etc.

a brief summary might be:
De-facto director - Based on tasks they perform
Shadow Director - Based on the power they exert
Person of Significant Control - Based on the ownership they have (shares / property / IP / etc.)

roughly speaking:
De-facto director would hold the same legal responsibilities as a normal director
Shadow director would hold the same legal responsibilities as a normal director
PSC would not hold the same legal responsibilities as a normal director, but is more likely to be considered a Shadow Director, and as a PSC it will be harder to show complete hands-off involvement, so some responsibility might be assumed...

It is worth understanding the philosophy around the continual changes we are seeing to company law regarding these definitions - ultimately it comes down to two things:
- transparency as to who owns a company (highlighted by the Russia / Ukraine war and subsequent company investigations)
- making sure that anyone who controls or is involved in control of a business can't walk away from responsibility.

There are two reasons why a retiring director would retain the shares / control the buildings or IP / etc.:
- a desire to see an income stream into retirement
- a desire to retain some control

If the first, then there are alternatives such as structured buy outs so that there is a financial return for the company
If the second, then it is appropriate that the retired directors should still hold a share of the liability...

[dave123456]

akirk said:

I would say that it is relatively simple to understand even though there are some complexities:

- Directors hold responsibility
- Shareholders do not (would all shareholders of BP be held jointly responsible for an oil spillage? - no).
- Once the parents have retired and are no longer directors, then their responsibility stops.
- Owning the shares / renting a building to the business etc. doesn't of itself technically give responsibility - but it might be categorised in a way which does (e.g. controlling a company's building can classify you as a PSC)

However - as mentioned, any influence or role still in the business will lead to easily proven allegations of shadow director, or PSC (person of significant control) and therefore liability may continue... A PSC is defined in a range of ways, but owning over 25% of the shares is included... You might think that having that held remotely through another company would change that but it doesn't:

Government says said:

Where a trust or firm would satisfy one of the first four conditions if it were an individual. Any individual holding the right to exercise, or actually exercising, significant influence or control over the activities of that trust or firm.

and

Government says said:

Conditions (i) to (iii) might be met directly or indirectly. A condition is met indirectly where an individual holds their rights through, for example, another company.

So if the holding company holds more than 25% of the shares in the active company and the retired directors hold more than 25% of the shares in the holding company then they are PSC and must be registered as such with Companies House.

It is worth noting:

Government says said:

Failure to provide accurate information on the PSC register and failure to comply with notices requiring someone to provide information are criminal offences, and may result in a fine and or a prison sentence of up to two years.

The concepts of Shadow Director and PSC are not the same - the reasoning behind understanding a PSC is about transparency and who owns a business, understanding ref. Shadow Directors is about understanding who pulls the strings - and making sure that they are held accountable. However, the description above about being still involved etc. would suggest Shadow Director.

There is also another category of 'De Facto Director' which is where someone is acting as director without being appointed formally - generally tends to be an employee who has stepped up, e.g. someone in finance sorting out the accounts and filing on behalf of the company etc.

a brief summary might be:
De-facto director - Based on tasks they perform
Shadow Director - Based on the power they exert
Person of Significant Control - Based on the ownership they have (shares / property / IP / etc.)

roughly speaking:
De-facto director would hold the same legal responsibilities as a normal director
Shadow director would hold the same legal responsibilities as a normal director
PSC would not hold the same legal responsibilities as a normal director, but is more likely to be considered a Shadow Director, and as a PSC it will be harder to show complete hands-off involvement, so some responsibility might be assumed...

It is worth understanding the philosophy around the continual changes we are seeing to company law regarding these definitions - ultimately it comes down to two things:
- transparency as to who owns a company (highlighted by the Russia / Ukraine war and subsequent company investigations)
- making sure that anyone who controls or is involved in control of a business can't walk away from responsibility.

There are two reasons why a retiring director would retain the shares / control the buildings or IP / etc.:
- a desire to see an income stream into retirement
- a desire to retain some control

If the first, then there are alternatives such as structured buy outs so that there is a financial return for the company
If the second, then it is appropriate that the retired directors should still hold a share of the liability...

FFS overthinking it somewhat.

I’d say a good exec chairman is essential here, looking after the families interests and with a clearly communicated exec remit.

[akirk]

dave123456 said:

FFS overthinking it somewhat.

I’d say a good exec chairman is essential here, looking after the families interests and with a clearly communicated exec remit.

The government? Not really they are pushing for transparency and clarity in who runs and controls a business - that is a good thing.

People owning a business through another company purely to pretend that they have no responsibility are effectively dishonest - they wish to keep control but bypass all the law’s requirements to take responsibility for their actions…

Why on earth would you put an exec chairman in and load those costs onto a small business? Either the owners sell up and stop involvement… or if they remain involved, not a problem they just have to accept their legal responsibilities… you don’t have to like it but that is this country’s legal framework for businesses…

[Digga]

Could there not be some element of 'fire wall' achieved by the retiring/owning director creating a holding company to take charge of major assets and shareholding?

[akirk]

Digga said:

Could there not be some element of 'fire wall' achieved by the retiring/owning director creating a holding company to take charge of major assets and shareholding?

That is exactly what the OP mentions the other company owners did - they had their shares held through another company.
However it is exactly that which is tackled in the bits quoted above from the government website to avoid this happening.

Bottom line - if you own more than 25% of a business / have a controlling mechanism (own the IP / offices / etc.) / have any say in how the company is run then you will be considered a PSC / Shadow Director... You can't continue to control a company / take all the profits, and ditch responsibility...

[NFT]

akirk said:

Digga said:

Could there not be some element of 'fire wall' achieved by the retiring/owning director creating a holding company to take charge of major assets and shareholding?

That is exactly what the OP mentions the other company owners did - they had their shares held through another company.
However it is exactly that which is tackled in the bits quoted above from the government website to avoid this happening.

Bottom line - if you own more than 25% of a business / have a controlling mechanism (own the IP / offices / etc.) / have any say in how the company is run then you will be considered a PSC / Shadow Director... You can't continue to control a company / take all the profits, and ditch responsibility...

Thanks guys, this is really good and educating.

Re a Fire Wall

From looking up other company that left me concerned about leaving my own in charge,

1. They created another Co (about two years prior appointing son on same day of resignation)
2. also filing a resolution on 1st Co with Distribution agreement and authorizing any director may have direct or indirect conflict of interest or interests against the company interests, it transferred parts of the business, property incl office and assets.
3. Less than a year later all shares moved to the new company that now had pretty much all assets and buildings but some Co vehicles.
4. Parents resigned as 1st Co directors, one becoming secretary of both business leaving son only director of first Co.

Interestingly, the Website, marketing, paperwork and email footers remained unchanged, touting Run by Managing Director "Parents Name", his fields skills and experience referencing kids as involved (a family business run by director, wife and sons.) in areas of the business, guarantee of professionalism and personal service etc.. long after the directorship change, and recently the son was made a director of the new owning company along with the parents. (it now owns a few businesses with them splitting areas of the original company, although they are small and seem to earn little.)

At time of sons offences though, it was very much no separation or change in paperwork presented to customers despite son being only director.

I suspect parents can be held responsible as shadow directors, and should be liable for putting son in a position he has caused havoc in, and potentially son could be treated as an employee they are liable for?

Tbh It's put me off leaving any of mine in charge without significant "assistance" dealing with issues, contracts and complaints.


P.S, with using old website and essentially misrepresenting a previous managing director as still a director, his skills, experience and industry connections being touted to win trust and business, could be further fraud if they wish to claim they had nothing to do with running original Co anymore? And they should have ensured this changed if leaving it as a director.

Edited by NFT on Thursday 7th December 20:06

[akirk]

If the son is a director then he will hold responsibility for what he did / does

If it is a matter where all directors should know / would be expected to know then all may be responsible

Very unlikely that the parents will be responsible for the appointment of the son - assuming the actual appointment to be legal and correctly filed - it won’t be the appointment which is an issue but the actions post appointment - and for liability you would have to look at intent / knowledge / decisions / etc - it is rarely simple… however the parents in this scenario will be potentially liable if they have been involved in decisions etc

[dave123456]

akirk said:

dave123456 said:

FFS overthinking it somewhat.

I’d say a good exec chairman is essential here, looking after the families interests and with a clearly communicated exec remit.

The government? Not really they are pushing for transparency and clarity in who runs and controls a business - that is a good thing.

People owning a business through another company purely to pretend that they have no responsibility are effectively dishonest - they wish to keep control but bypass all the law’s requirements to take responsibility for their actions…

Why on earth would you put an exec chairman in and load those costs onto a small business? Either the owners sell up and stop involvement… or if they remain involved, not a problem they just have to accept their legal responsibilities… you don’t have to like it but that is this country’s legal framework for businesses…

Typically you have gone straight for the rules. These are fine but if no one is going to follow them then it doesn’t really matter.

From the extent of your reply I’m not going to argue the point. Ones a legal approach the other is a practical and more commercial approach, and with the op it is hard to tell which is the best.

Eta

The opening post suggests they wish to retain ownership, so I really don’t see how your post helps other than give some legislation and jurisdiction as to the framework if things go wrong. If I was the op I would want to prevent things going wrong, rather than know my rights when they do.

But each to their own.

Edited by dave123456 on Friday 8th December 14:46

[akirk]

I think you misunderstand…
The OP was comparing his situation with another business and asking whether you could keep control and hand off responsibility - simple answer is no (though many try and some might appear to succeed).

As to the legal view v. a pragmatic or commercial view - I spend a lot of my time advising businesses on a consultancy basis- so will always start from the legal place. I also feel strongly that it is the moral place to be, if you own / profit from a business, then it is not unreasonable to hold responsibility - equally it is not acceptable to have people looking to gain from business and find ways to avoid their responsibility - I am sure that I won’t be the only one to find that selfishness and arrogance fairly repugnant…

No issue with using the law and looking for advantage within the bounds of the law, but this is quite clear legal direction - if you have major control, you hold responsibility