Liquidation marks the closure of a business as all its assets are sold off, usually as a last resort when the company is unable to pay off its debts and there’s no possibility of recovery.
However, what if the directors of a company, whether it’s solvent or insolvent, cannot agree on whether to proceed with liquidation? This can be especially challenging when there are only two directors who hold an equal share in the company, and may require formal mediation to break the impasse.
In such cases, professional business mediators can provide valuable assistance by offering impartial guidance and judgement to help maintain business momentum despite the complex situation.
If there is a shareholder agreement in place, it may offer some guidance, but it may still be unclear how to resolve a dispute if one director favours liquidation while the other opposes it. If the deadlock persists and cannot be resolved informally, seeking a decision from the courts may be the only solution.
Using ‘Just and Equitable’ Grounds for Winding Up Petitions in Director Disputes
In the event of a deadlock arising over the decision to liquidate, a director who wishes to withdraw from the business can apply for a winding-up petition based on “just and equitable” grounds, thereby relinquishing the decision-making responsibility to the court.
If the court decides that liquidation is the most suitable option and the company is solvent, it will be placed in Members’ Voluntary Liquidation (MVL) and closed down permanently. While this may not be the ideal outcome for the other director, it does provide a way to break the impasse and enable both parties to move forward.
However, aside from this type of winding-up petition, are there any other alternatives available to the company?
Solving Director Disputes by One Director Buying Out the Other
Disputes between directors can create an environment where it becomes impossible to continue working together in the business. This situation is not conducive to the success of the company. However, if one director is able to buy out the other, it could resolve the dispute and allow both parties to move on.
Buying out the other director is a common method of resolving disputes, especially in cases where married directors are divorcing. This approach can lead to a clean break and provide an outcome that satisfies both parties. Nonetheless, if poor communication or longstanding arguments are at the root of the dispute, this can be a hazardous situation, especially if the company is experiencing financial difficulties.
Navigating Director Disputes in Insolvent Liquidations
In the context of an insolvent company, disputes between directors are a grave issue, particularly if they cannot be resolved. UK insolvency legislation mandates that, in such situations, directors must prioritise the interests of creditors to limit their losses.
The disagreement between the directors over whether or not to liquidate is a secondary matter. The crucial point is that, if the interests of creditors are not given precedence, directors can be accused of misconduct and may be held personally liable or disqualified if they continue to trade wrongfully.
The Duties of Directors in Insolvent Companies
Directors have a set of duties that they are required to fulfil as office-holders. Failing to perform these duties can have negative consequences on their personal and professional lives, especially when creditors are at risk of incurring financial losses.
When a company becomes insolvent, it must seek the assistance of a licensed insolvency practitioner (IP). If business rescue is unattainable and liquidation is the only viable option, the matter may be taken out of the hands of the directors.
Director disputes are not uncommon, but they can be complex and lead to long-term financial and operational issues for a business. That is why it is crucial to seek professional advice at an early stage to identify a viable solution.
InsolvencySupport.co.uk are experts in insolvency and liquidation, and they can provide dependable and impartial guidance. You can contact one of their team members to arrange a free consultation on the same day. They have an extensive network of offices throughout the UK, so you are always within reach of professional help and support.