Resigning as a Director

[merlehaggard]

Hi, my husband is shortly to resign as a Director from a company. There is only one other Director and they are both 50:50 shareholders and he intends to remain a shareholder. The other Director intends to carry on alone and my husband has another job to go to. There should be no debts as far as we know. The property they work from, and own, should cover their overdraft. Should have money in the bank if the other Director did his job and invoiced regularly and ensured they were paid.

I can see from another thread that he needs to resign officially with his company from his position as Director and then they need to send in the form to Companies House. In reality, he will have to check this gets done otherwise it never will. However, my question is, on the other thread, someone said to transfer shares to a partner. Why do you think this would be suggested? Could it be anything to do with liability for past events? We could do this but only if there would be a real benefit. Thanks.

I can't think of any real benefit to transferring shares. Any liability for past events has already been determined by whether he has behaved with due regard to his duty of care. Worth noting that you're husband should inform the bank if he signed a personal guarantee when they took out their overdraft, they'll require notice.

Thanks. That's what I though regarding personal liability. I'm almost 100% sure that we aren't personal guarantors for anything as the conversation came up several times and we resisted, but will get him to just confirm this.

It depends if they are worth anything. If they are why give them to the other director for no payment?

Also remember once he resigns as a director he loses rights to see documents and invoices etc so make sure he has seen everything he needs to before he resigns as a director. If he is also an employee then you will need to deal with resignation as an employee too and check his employment contract if he has one.

If his partner will offer him a sum to buy his shares out though that may be worth it as better a hand in the bird than one in the future bush which may never materialise.

Is his employment different to his directorship then? Is it not one and the same? To be honest my dad said as much but I thought he was wrong. Also, he didn't exactly plan to walk away and give his shares to the other director but I suppose by leaving his money in the company (if indeed there is any) he is virtually doing that. I think that technically there should be money in company's but the cash flow is bad. My concern is what you say about having no rights as a shareholder. He could drain the company of profit by giving himself a high salary and we would never know, or be able to stop it. Therefore, there may never show as a profit to declare a mutual dividend. On the other hand, there is no money to just buy us out. Could we have the company valued and agree a figure to be paid monthly? What is your opinion?

1. Yes, Some directors are not employees, are not paid a tax under PAYE and are self employed or just non execs and are just paid dividends. You will know which he is as you probably know if he got a pay slip and a P60 each year etc. or if he was just paid dividends. You notify companies house of a resignation of a companies Act directorship and he should write to the company (his partner) to resign his employed and indeed if not employed to let him know he has formally resigned as a director. If he has a written employment contract it will say how much notice to give. If not the law sets it out - a week for each year up to 12 years of service.

1. Some companies - the better ones - even 2 man companies - have a written contract between the shareholders called a shareholders' agreement (I write them). That says what happens if you leave to your shares and things like that. Assuming they have no written agreements about shares neither can force the other to buy them out. You cannot force a buy out. A shareholder agreement would also make it clear they could not do what you fear - pay a large salary to one director. If your husband resigns he will not be on the board so cannot be involved in board decisions such as giving a director more money by way of salary. Assuming there is no shareholder agreement saying increased pay needs both shareholders to agree do these two have 50/50 each? That is known as deadlock. If so then neither can out vote the other on the board or in shareholder meetings. Again a shareholder agreement will say what happens if there is a deadlock on something if there is one. Also read the company's Articles although they are not a contract. If you do not have them you can buy them from companieshouse.gov.uk. They may say something about which of them has a casting vote in meetings and about selling shares but probably nothing too useful here.

1. The best solution is going to be if the two of them agree some kind of resolution - eg your husband could stay on the board attend monthly meetings and keep his shares (assuming they cannot afford to buy him out now) rather than lose all his power and disappear. Also as there may be no shareholders' agreement there is nothing to stop either of them if they resign setting up a competing company - so beware his partner putting new business through a new company instead - that might breach directors' duties but if no employment or shareholder agreement stopping it it remains an increased risk.

1. If the company is really not worth much then resigning and giving up the shares may be no big deal and might protect from liabilities so it is not necessarily wrong to walk out now and agree a nominal or monthly amount for buying out the shares with the transfer of shares only happening when the very last payment is made. Do not transfer shares now on a promise of future payments for them. Hopefully your husband has a share certificate and is entered in the company's books as a shareholder which will prove his ownership. If not then he needs to think of how he can prove he owns shares. The company's annual return which again you can buy from Companies House usually shows the shareholders and their shareholdings.

1. Just make sure your husband is not going to take any of the company's property or customer list when he leaves. If he remains a director he has a duty to the company so taking on a job in a competitive firm might breach that. If the area of the new job is different however it will probably be fine.

Thank you very much for your response. It is very kind of you to reply in such detail. I don't think the company will be worth a huge amount but fully expect it to become insolvent in the future, considering the other directors attitude to credit control - even more so when left to it. For this reason, he doesn't want to risk staying a director and having his name go with it as there is every chance he may become a director in the future. I think his best bet would be to come to an agreement for monthly payment and get what he can out of the company whilst he can. Just two more questions - 1. Does he need to send 2 separate letters of resignation (one for his directorship and one for his employment) or can one letter cover the two, and 2. He will be leaving and be taking a client with him - but it was always very much his client to start with, being a family member. Is this ok? I don't think it would in practice ever be contested anyway, but I just wondered what the legalities are.

Actually, I will clarify that. He isn't taking the client with him. He is in fact going to work directly for that client. I guess there is a difference?

I read your title as "resigning as a dictator"

I thought you were Kim Jong Un.

It sounds like there is no "restrictive covenant" in a written employment contract or a shareholder agreement which would stop him going to work for the company but he must check to see if he has signed anything like that. On the questions:

1. Does he need to send 2 separate letters of resignation (one for his directorship and one for his employment) or can one letter cover the two,

One can cover both - both send to his partner / the company and then file the resignation at companies house

and 2. He will be leaving and be taking a client with him - but it was always very much his client to start with, being a family member. Is this ok? I don't think it would in practice ever be contested anyway, but I just wondered what the legalities are.
Yes, no problem if he signed nothing to stop him doing that once he has resigned. Whilst he is still a director he owes a duty to act in the best interests of the company. I suppose if his leaving mean the company loses that client there might be some dispute over whether he should but I doubt there is enough money at stake here to make it worth anyone going to court over it.

He should make sure in the next job he has a written contract of employment or a written consultancy agreement if he is going to be self employed.

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Thank you very much for your time. It has made it all a lot clearer.