Unacceptable Director Behaviour

[rsq9]

Long story short.

Together with my co-director we set up a company and built it up over 20 yrs to be a nice ‘lifestyle’ profitable business.
It was agreed that 5 yrs ago I pursue another interest but retained my 50% share of our company but I have regularly been in touch with my equal director but have left the day to day running up to him. (yes I trusted him).

I have now found that he has setup another company, that although isn’t the same field as our company, is using our companies office, facilities and more concerning, our staff to work within his separate business. Due to his companies lack of real overheads it is now heading to be worth more than the original company.

As everyone would agree, my first port of call is to ask the views of members of a car forum as to the legality of what he is doing and what my next step should be.

Thanks in anticipation

[jeremyc]

How is the new company engaged with the old? Could it be there is an agreement in place to use the buildings, have the staff deliver services etc?

Obvious first step is to have a discussion with him and find out exactly what the position is.

[Mr Overheads]

Is the joint company charging the NewCo a few for use of it's staff, premises etc? That's all that is happening one company is delivering outsourced services for another. i.e. YourCo has won a contract to deliver a service to NewCo. Is that contract being delivered for £0?

Does the other Director have a contract that says he can't setup another co?

[Tom8]

How do you do your accounting? Surely there could be tax risk here, paying one lot for two separate entities?

[rsq9]

There is no agreement between the companies regarding splitting of expenses.

Staff employed and paid in full by the main(Company A) are working for the company he has set up (Company B) and no charging is being made to Co B.

Company A marketing is also working for B but no charging being made.

I am very shocked to find this out as I have always trusted him.

[stuthemong]

Have you got shareholders agreement for first co?

This is potentially very very messy.

What a crook, but this will be complicated to unpick if he behaves like I think he’s about to…..

Oof. V sorry to hear. I’ve walked away from a profitable company setup in the past due to similar-ish issues. Wasn’t worth the stress/annoyance to me and I’ve never looked back.

[rsq9]

Mr Overheads said:

Is the joint company charging the NewCo a few for use of it's staff, premises etc? That's all that is happening one company is delivering outsourced services for another. i.e. YourCo has won a contract to deliver a service to NewCo. Is that contract being delivered for £0?

Does the other Director have a contract that says he can't setup another co?

There is no agreement for Co B to use any facilities staff etc and no charges have been made for this use.

The other director setting up another company is not an issue, it is the fact that his Co B is using the facilities and staff time for no charge.

Thanks for replies so far. Obviously I need to have a discussion but he won’t be able to refute what he is doing so what are my options going forward?

[FlyingPanda]

This is almost certainly going to come down to the fine detail of your shareholders' agreement. A structure where you both hold equal shares should have some provision for deadlock scenarios (assuming you are not going to agree on the way forward) so I would have a good read of that first and take some advice if you have to.

The next thing is to decide whether this is 'terminal', ie: even if it turns out there's nothing stopping him from doing this, is the breach of trust sufficiently serious that you no longer want an association with him? Do you have a mechanism for valuing your shares that might permit him to buy you out (or you to buy him out?)

A starting point is always to consider what would be the best outcome for you, now that this has happened, and work backwards from there.

[Panamax]

I'm trying to work out what the real issue is here.

50/50 share ownership so you continue to receive 50% of the profits (dividends) even though you no longer work in the business.

What remuneration does the executive director receive by way of salary and benefits, in addition to his 50% dividend rights??

[ATG]

The issue is that that the director is using his position in the first company to the benefit of the second company and the detriment of the first.

[zoomy]

Just a thought

Company A has 2 directors
Director 1
Director 2

Director 2 decides they have had enough and wants to step back. Director 2 wants to keep their shares and benefit from any additional value the company realises through the work of director 1 whilst presumably benefitting equally from any dividend declared?

Director 1 decides that is unfair and believes they should stand to benefit from any additional hard work by setting up company B.
Company B does well and director 1 benefits from the the additional hard they and their staff create.
Meanwhile company A remains at a static value leaving director 2 no worse off.

Director 2 grumbles he's feeling hard done and deserves all the increase in value director 1 has generated without adding value themself?

I suspect that will be thoughts of your fellow director?

[StevieBee]

rsq9 said:

It was agreed that 5 yrs ago I pursue another interest but retained my 50% share of our company but I have regularly been in touch with my equal director but have left the day to day running up to him.

What was the nature of the retained shareholding?

If you absolved yourself of any directorial responsibilities, leaving the shareholding in place as an investment, then you have little grounds on which contest his decisions and actions.

If you retained directorial responsibilities, then you had the opportunity and right (and obligation) to question his actions but for whatever reason, did not do so.

The Shareholder Agreement will set out the remedy to the situation but in keeping with every single thread of a similar nature ever posted, I'd bet there isn't one. So, I'm afraid to say that I don't think there's much you can do unless it can be proven his actions are illegal or contrary to legislation that relate to running such a business.

[rsq9]

ATG said:

The issue is that that the director is using his position in the first company to the benefit of the second company and the detriment of the first.

Thank you this is the situation in a nutshell.

My co(50%) director receives a substantial salary and Co A has minimal profits for distribution due to the high expenses and staff costs incurred. Staffing levels are also much higher than those required to staff Co A with the subsequent drain on profits. If it help Co A is turning over close to £2M.

I have not taken any dividends since I actively worked in the company. I appreciate I should have acted sooner but I have had health issues and so I trusted my Co director to act in the best interest of our company.

Edited by rsq9 on Tuesday 6th February 11:06

[akirk]

Panamax said:

I'm trying to work out what the real issue is here.

50/50 share ownership so you continue to receive 50% of the profits (dividends) even though you no longer work in the business.

What remuneration does the executive director receive by way of salary and benefits, in addition to his 50% dividend rights??

Surely that is fairly obvious?
effectively the other director is removing any profit from Company A (where he has to share it) into Company B where he gets it all
Company A value goes down because it shows no profits, Company B value goes up as it is very profitable
Other director gets all the value in a sale of businesses...

effectively the other director is stealing from the dormant director - whether or not that is legal will depend on shareholder agreements / articles / etc.
there may be an argument that the other director didn't have the authority to make those decisions...
equally there could be an argument that the dormant director (OP) has not fulfilled his obligations as a director (assuming he is still a director - not just a shareholder - in which case going dormant but staying in touch might not be sufficient to have discharged his duties as a director...)

There are legal duties under the Companies Act incumbent on any director:
https://www.gov.uk/guidance/your-duties-responsibi...
good starting point...

this holds the meat for this situation:
https://www.gov.uk/guidance/director-information-h...

The Law said:

Promote the success of the company

This means considering the impact your company has on others, the environment, any employees and colleagues.

It also requires you to act in the interest of creditors if you are insolvent.

The Law said:

Avoid conflicts of interest

Do not take advantage of your position as a director to gain unfair advantages or create conflicts in business or other relationships.

The Law said:

Interests in a transaction

You must tell other directors if you personally benefit from a company transaction.

Then:
https://www.gov.uk/company-director-disqualificati...

The Law said:

‘Unfit conduct’ includes:
- using company money or assets for personal benefit

Just based on those - which are legal duties for a director, I would argue that the other director is in breach of the Companies Act:
- has taken advantage of his position as director to gain advantage etc.
- Presumably didn't tell the other director that he would personally benefit from a company transaction
- has used Company A's assets for his personal benefit by building Company B

I would
- have a meeting
- pass over a print out of the relevant bits from the link above / the Company Act
- note that he is in breach of the Company Act which could have legal / financial / criminal consequences
- suggest that the easiest option would be for him to hand over 50% of Company B so that it doesn't matter where the profit sits
- plus 50% of any dividends taken out of Company B which should have been split.

Then sell both companies and let him run his own / let him buy you out of both...

[Panamax]

Hang on a minute, lots more information is needed. Turnover is irrelevant, the real question is gross and net profit.

OP says there's no dividend because the running costs, including other director's salary, are too high. Well, as a 50% shareholder he must have agreed that remuneration, if it's properly payable.

Sure, the other director shouldn't be using the company's time/money to run a separate business, but chasing a solution to that is likely to open up a whole can of worms. Proving any of what's going on, or not going on, is likely to be an expensive nightmare.

What's the share capital of this company? In other words, how much did OP invest in it?
What's the profit history?
Who does the accounts?
When was it established?
What's the dividend history?
And if there's a shareholders agreement, what does it say?

[Panamax]

akirk said:

plus 50% of any dividends taken out of Company B which should have been split.

Unless this director has a service contract requiring him to devote all of his working time and attention to company A there's nothing to stop him being involved in company B, especially if company B is in a different line of business.

More facts are needed. For instance, what stationery is being used in the office? When they send out letters and invoices, how do they make sure the right names are used? Are there different email addresses and phone numbers? Who answers the phone and what do they say? How are the accounts kept separate? Who's looking after the bank accounts? Are the it two businesses fully integrated or is company B just using a bit of office space at company A? If the latter, is company B making any contribution to overheads or paying any rent - because that may be about their maximum exposure here.

[akirk]

Panamax said:

akirk said:

plus 50% of any dividends taken out of Company B which should have been split.

Unless this director has a service contract requiring him to devote all of his working time and attention to company A there's nothing to stop him being involved in company B, especially if company B is in a different line of business.

More facts are needed. For instance, what stationery is being used in the office? When they send out letters and invoices, how do they make sure the right names are used? Are there different email addresses and phone numbers? Who answers the phone and what do they say? How are the accounts kept separate? Who's looking after the bank accounts? Are the it two businesses fully integrated or is company B just using a bit of office space at company A? If the latter, is company B making any contribution to overheads or paying any rent - because that may be about their maximum exposure here.

The OP mentioned that Company A staff were being used - suggests that Company B is a similar line of business, or similar enough to be considered work that perhaps should have gone through Company A - in which case profits should be in Company A... If the staff from Company A can be used in Company B then there is presumably no reason why Company A could not have delivered Company B's output - regardless of being in the same field or not (not according to OP).

From what we have been told it looks very simply a though the other director has decided that he doesn't want to work to make money for the OP so is funnelling all profits off into his own business - cracking idea apart from the breach of the Company Act

[Collectingbrass]

Panamax said:

akirk said:

plus 50% of any dividends taken out of Company B which should have been split.

Unless this director has a service contract requiring him to devote all of his working time and attention to company A there's nothing to stop him being involved in company B, especially if company B is in a different line of business.

More facts are needed. For instance, what stationery is being used in the office? When they send out letters and invoices, how do they make sure the right names are used? Are there different email addresses and phone numbers? Who answers the phone and what do they say? How are the accounts kept separate? Who's looking after the bank accounts? Are the it two businesses fully integrated or is company B just using a bit of office space at company A? If the latter, is company B making any contribution to overheads or paying any rent - because that may be about their maximum exposure here.

As I read it Co B owe Co A for some staff costs too.

[paulrockliffe]

If you can establish that the staff think they're employed by and working for company A then that might open up some avenues for you. If that's the case, then there may be an accounting issue that can be corrected to put the profit back where it should be.

[MaxFromage]

Your next step should be to engage a solicitor well versed in company matters. BEFORE you speak to the other shareholder. In my experience, the party who jumps first will have the upper hand in these matters.