DIRECTORS’ DISPUTES MEGA-GUIDE

Directors’ disputes can paralyse a business and end up destroying its value – possibly built up over many years.

If you are involved in a dispute with one or more of your fellow directors – and you can’t see how things are going to be resolved, you may need to consider some formal options.

In this guide we look at some forms of external administration that can be used to preserve the value of a business or its assets – when those values are in peril from an irreconcilable directors’ dispute.

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    At Dissolve, most of the directors’ disputes we get involved in relate to small or medium sized companies where the directors are also shareholders. Quite often these can be family run companies.

    We see disputes caused by financial stresses in the business – but we also see financial stresses in a business caused by disputes. Either way, businesses and personal relationships can be irretrievably damaged if director disputes are allowed to drag on.

    In this guide we look at:

    • How, and in what circumstances, liquidation of the company can happen when its directors are in a dispute
    • Some other forms of administration that can be used to preserve a business and break a deadlock caused by a directors’ dispute.

    What are the main causes of directors’ disputes?

    There are all sorts of causes of disputes amongst directors. Here are a few of the more common causes we come across:

    • Financial pressures from poor trading performance
    • Disagreements about:
      • Management decisions and/or the future of the business
      • The level of investment in plant and equipment or other things
      • Directors’ remuneration and/or directors’ loan accounts
      • Where the company’s solvency is in question – whether the company should be allowed to carry on trading – or should be liquidated
    • Inability to agree on the value of the business in circumstances where a director (who is also a shareholder) is looking to leave

    Can a single director cause a company to be liquidated?

    You have reached the end of your tether and have formed the view that the company is insolvent and should be liquidated, but your fellow director(s) disagree.

    What are your options?

    In short, a Creditors voluntary liquidation is not an option for you if you won the Company 50/50. To initiate a creditors voluntary liquidation requires a majority of directors (that is, more than 50%) to make a resolution to call a meeting of shareholders – so that the shareholders can vote on whether the company should be liquidated.

    Similarly, a Voluntary Administration (which can lead to the company being liquidated) also requires support by a majority of directors. So, where the company has more than one director – a single director cannot cause the company to be placed into Voluntary Administration. One of two directors is not a majority.

    What options are available to a single director faced with an irreconcilable directors’ dispute?

    There are options for a single director involved in a directors’ dispute to make application, via their lawyers, to the Court to have an impartial and independent professional person, usually a Registered liquidator, appointed to the company to take over control from the directors and to decide its future.

    There are 2 main forms of external administrations that can be used in this situation:

    • Provisional liquidation
    • Court appointed Receiver and Manager

    For a Court to make an order to appoint a Provisional liquidator or a Receiver and Manager to the company it will need to be satisfied, amongst other things, that (for whatever reason) the current directors can no longer effectively control the company in the best interests of all of its shareholders. A key consideration will be whether there is some risks that, if the directors were to continue, the value of the business assets and, ultimately, the value of its shares would be likely to deteriorate.

    What is a Provisional liquidation?

    A Provisional liquidation is a form of administration provided for in the Australian Corporations Act that allows for a Registered liquidator to be appointed to the company as a Provisional Liquidator.

    Key elements of a Provisional Liquidation are:

    • Appointment is made by a Court order following an application, usually, by a director or a shareholder
    • The Provisional liquidator is appointed by the Court – and needs to:
      • Have provided a written Consent to act as Provisional liquidator
      • Make a written declaration regarding independence and any conflicts of interest
      • Act impartially and in the best interests of the company, its creditors and, if its solvent, its shareholders
    • The appointment is usually made because there is a dispute amongst the directors which has made the situation untenable and runs that risk that the interests of all or some of its creditors and/or shareholders will be diminished.
    • A Provisional liquidation is usually used when there is some uncertainty about the company’s solvency.

    The Provisional liquidator has 3 main areas of responsibility:

    • To take control of and preserve the company’s business and/or assets – in other words, to maintain the ‘status quo’.
    • Investigate the company’s financial position and affairs, including into any specific areas the Court had directed him/her to investigate
    • To make a report back to the Court within a specified timeframe regarding the company’s financial position, any matters he/she had been specifically asked to investigate and make a recommendation back to the Court about the company’s future. That recommendation might be that the company be wound up and that the Provisional Liquidator becomes the Liquidator.

    In non-technical language the Provisional liquidator’s job could be described as to hold the fort while they have a look at the books to see what shape he company is in and then work out how best to solve the issue(s) the directors were arguing about and then to tell the Court what they think should happen – so everybody is treated fairly.

    What is a Court appointed Receiver and Manager?

    A Court appointed Receiver and Manager is a form of administration provided for in the Australian Corporations Act that allows for an impartial and independent person, usually a Registered liquidator, to be appointed to the company or to some of its property as a Court appointed Receiver and Manager.

    In practical terms the key elements of a Court appointed Receiver and Manager are essentially the same as those of a Provisional liquidation, as described above. The main differences, are that a Court appointed Receiver and Manager:

    • Tends to be used in circumstances where the company is clearly solvent, whereas a Provisional liquidation tends to be used when there is some uncertainty regarding the company’s solvency
    • Might not be appointed over the company ‘as a whole’ but just be appointed over certain property or assets of the company. For example, if the directors were in dispute about the sale of a property owned by the company, the Court might decide to appoint a Receiver and Manager only over the property.

    Again, in practical terms, the key areas of a Court appointed Receiver and Manager’s responsibilities are generally much the same as those of a Provisional liquidator. The main difference is that the Court order will tend to provide more specific instructions about what the Receiver and Manager is appointed to do and will be more specific about what assets or property he/she is to take control of.

    You should seek legal advice regarding which, if either, form of external administration might be the best suited to your company’s circumstances and the nature of the directors’ dispute.