Director dispute over liquidation

When a company is liquidated it signifies the end of the business as all assets are sold and the company closes down. It’s a drastic move, but unfortunately one that is inevitable if the company is insolvent and there’s no hope of business recovery.

But what happens when directors disagree over whether to liquidate their company, whether it’s solvent or insolvent? When there are only two directors and they each hold an equal share in the company, formal mediation may be needed to break a deadlock.

Professional business mediators can be invaluable in this situation, providing independent guidance and judgement on maintaining business momentum in the face of a complicated situation.

Or maybe a shareholder agreement is in place for guidance, but even then it may not be clear how to resolve a dispute if one director wants to liquidate and the other doesn’t. If a deadlocked director dispute really can’t be resolved unofficially, one solution is to seek a decision from the courts.

Winding up petition on ‘just and equitable’ grounds

When a deadlocked dispute occurs with regard to liquidating, the director wishing to exit the business can apply for a winding up petition on ‘just and equitable’ grounds. This hands responsibility for making a decision to the court.

If they decide that liquidating is the best option and the company is solvent, it will enter Members’ Voluntary Liquidation (MVL) and close down permanently. Although not the best outcome for the other director, it does break the deadlock and allow both parties to move on.

But are other options open to the company apart from this type of winding up petition?

One director buys out the other

Director disputes can make it impossible to work in the business together. It’s not an environment that promotes business success, but if one director was able to buy out the other it would settle the dispute and allow both directors to move on.

This is a common form of dispute resolution when married directors are divorcing. It allows for a clean break, and can provide the outcome both parties seek. But poor communication or longstanding arguments can also be to blame for director disputes, which is potentially a dangerous situation if the company is in financial difficulty.

Director disputes and insolvent liquidations

Director disputes are a serious matter if a company is insolvent and the dispute cannot be resolved. UK insolvency law states that directors must place creditor interests first in these circumstances, to minimise their losses.

The fact that directors don’t agree on whether to liquidate is secondary to the fact that, if creditors aren’t prioritised, directors face allegations of misconduct and potential disqualification/personal liability if trade continues wrongfully.

Director duties when a company is insolvent

Directors must fulfil certain duties as office-holders. Failing to do so can lead to damaging consequences personally and professionally, particularly when creditors are at risk of suffering financial loss.

The company must seek assistance from a licensed insolvency practitioner (IP) when it enters insolvency. The matter may be taken out of directors’ hands if business rescue is impossible and liquidation is the only option.

Director disputes are not uncommon but they can be complex and lead to long-term financial and operational problems for a business. That’s why seeking professional advice at an early stage is vital if an effective solution is to be found.

UK Liquidators are specialists in insolvency and liquidation, and can provide reliable unbiased advice. Please contact one of the team to arrange a free same-day consultation – we work from an extensive network of offices throughout the UK, so you’re never far away from professional help and support.