50 % shareholder and Director left, leaving all the debt to me

[nicknock]

Hi

I think I know the answer to this but I though I would check.

I joined forces with a business partner last year as 50 % shareholders and equal responsibility Directors. She took out a personal loan and put it in to the business as a Directors loan to pay for equipment, the office etc. The agreement was the business would pay her back. We also took out a company credit card and an overdraft.

She decided to resign as a Director in January as the pressure was too much and she wants to focus on her kids, we amicably agreed that she could resign and gift the shares back over to me.

The thing is, whilst the company owes her the directors loan and the company is responsible for paying back the credit, our cash flow is down at the moment so I'm not even paying myself in order to pay her back, pay or our other credit commitments and our suppliers. We'll also have a corporation tax bill to pay in October.

I just wondered if we have actually dealt with this properly legally, it seems unfair that she could just walk away and now all the debt is left to me to personally cover after agreeing to go in to business together on a 50/50 basis.

Any help appreciated?

Thanks

[R0b]

Hello

I assume the company is a limited company?

As to whether it was all dealt with in a proper legal manner is something I can't say based on the limited information you've provided. What I would say is that directors of a limited company have certain duties to the company known as fiduciary duties - these duties are implied by virtue of the Companies Act 2006. Click on the following link for an overview of the duties of a director of a company for more information

Link for duties of a director

Part of those duties are to act in the best interests of the company and promote its success as well as exercising reasonable care and skill. With the other director having taken out a loan on in favour of the company, but for her own personal benefit might be in breach of her duties as a director and with you being the other director, ought to have flagged that up or looked at opportunities to see if any action could be taken against her for a potential breach of her duties.

Ultimately, you also have a duty towards your creditors in making sure that you are not deliberately continue the company as a going concern when in fact the company is spiralling further into debt. That said, you may wish to consider looking at dissolving the company and if you do then you definitely should take some insolvency advice because it wold protect you against any insolvency claims.

Of course insolvency is always going to be a last resort but I doubt you are going to get a great deal of help because you need someone who can carry out a review of the company and give you advice based on that knowledge and information.

[nicknock]

Hi

Thanks for your response. It is a limited company yes. She has resigned as a Director so doesn't have any responsibilities anymore.
I don't know what you mean by she took the loan for her own personal benefit? She took the loan out as we couldn't get a bank loan as a new company, she put it in to the business as a Directors loan, which is a legal and pretty normal course of action?


We don't need to dissolve, we're just juggling until we have new contracts secured.

Thanks for the advice, but it's more a question about her responsibility rather than what I should do with the company.

[R0b]

Sorry I had misread the initial post, I thought she had used it as a personal benefit.

Either way, it comes down to whether or not she has breached any of her duties as a director, but also you may want to look at her written contract (if any) and the company's articles to see whether she had breached anything in relation to securing the loan and putting it in the name of the company and if so, did you ratify that decision or imply in such a way that the breach was ratified?

Company law is not so straightforward and can be very difficult to get your head around. If you really want to know about her responsibility and what action or remedy the company may have against her, then I would suggest you really need to speak to a corporate lawyer.

[nicknock]

OK thank you

[davenewbergr]

I take it that she took out a personal loan (possibly without telling the bank what it was really for, since banks won't generally lend on personal loan terms if they realise it should be on commercial loan terms together with a director's guarantee) and then made that money available for the company to use, treating it from an accounting point of view as a director's loan.
The mistake was to allow her to simply withdraw from the company without planning for all the ramifications. Plus, I wouldn't mind betting that you didn't have a shareholders' agreement at the outset, so whether you could have prevented it is a moot point.
You need to enter into a new agreement with her concerning repayment of her loan. The company could become insolvent, the way you are describing things, and that is not in either of your interests. If necessary she may have to restructure her borrowing from wherever she borrowed from. This will be difficult if she did not disclose what her borrowing was really for.
No doubt she wants you, and you originally agreed, to cause the company to continue paying back her loan at the same rate as when she was still active as a company director - even though she wanted to retire.
Without more, a director's loan is repayable on demand if the director ceases to be a director. The company has no lawful reason to withhold payment - hence why I said there should have been a self-contained agreement over her departure, which could have specified that she was only to be paid £X in arrears per month to discharge the director's loan.
Since she is no longer a director nor even a shareholder, she has no duties or responsibilities to the company.
You need to reach an agreement with her for slower repayment rates, and you would not be negotiating from strength.