Today’s blog is a guest article from Keith Tully at Real Business Rescue, one of many businesses who work alongside Farleys’ insolvency solicitors to assist businesses facing financial difficulties.

During a shareholder dispute, if both shareholders hold 50 per cent ownership in the business, there will be no clear casting vote against key decisions, such as taking the company liquidation route or changing the direction of the business. If one shareholder wishes to close the business without agreement from the other shareholder, this is likely to cause a dispute – resulting in a deadlock.

Prolonging this state could eventually have an impact on company finances and the reputation of your business. By disrupting the smooth running of your business, director disputes can cause company operations to halt to a standstill to the disadvantage of creditors and customers. There are many reasons shareholders may enter disputes, from major disagreements, strained relationships, or a conflict of interest.

Shareholder disputes amongst family businesses

If you operate a family business, it is common for the breakdown of family relationships to act as a precursor for shareholder disputes. Although forming a family company can present a host of benefits, both reputational and operational, it can have a dire impact on the future of your business if relationships disintegrate.

Several possible routes can be pursued to remedy this situation; however, they are likely to take time and commitment.

  • Mediation: Enlisting an objective individual to strike a compromise or encourage shareholders to arrive at a suitable conclusion and settle the manner. Third-party intervention can help bring the severity of the affair to light and help company directors unite.

    Mediation can also help keep future disagreements at bay by pre-determining issues that may likely arise. If communication breaks down between a mediator, you may wish to enlist a solicitor for dispute resolution services

  • Buy out partner’s shares: By buying out the partner’s shares, the business will be under the operation of a sole director, who will have the freedom to decide if the business should enter company liquidation, or if the business should take a particular route

  • Special grounds for winding up petition: This route involves court involvement as the director wishing to close the business can submit a winding up petition under just and equitable grounds. The court will decide on whether the business should be liquidated, or if an alternative route is better suited, such as buying out shares

The director wishing to continue ahead with the business may be forced to pave their path forward by forming a new business and utilising the same customer base, suppliers and operational structure.

As a bottom line, failing to act in the best interests of creditors could have serious repercussions on your business. If you have found to have acted unscrupulously, you could be held personally liable for the debts of the business.

Take note of your personal position concerning personal guarantees as you may be tied to such debts following your departure from the business. If your business is then liquidated following your exit, the lender may approach you to recover the loan which could have a crippling impact on your personal finances.

Keith Tully is a partner at Real Business Rescue, a nationally renowned insolvency and company rescue service provider for distressed company directors, part of Begbies Traynor Group.