Breaking Up is Hard to Do – disputes inside companies

The Scenario

Bill and Tom are bakers and set up a specialist bread and cake shop in Borchester. Their products sold like, well, hot cakes, and after a couple of years they had opened a branch in nearby (but upmarket) Ambridge. Things were looking good.

After taking advice they had incorporated their business as Bill and Tom’s Bakery Ltd, with each of them being a director and owning half of the shares. This meant that they had no personal liability towards creditors, and there were tax advantages as each of them could draw some wages as an employee and take the balance as dividends, avoiding NI contributions.

The leases were in the name of the company, and the employees were too. All very organised.

The Problem

Bill and Tom fell out over some doughnuts. Tom went off and wouldn’t talk to Bill or co-operate in running the business. It was deadlock as they each had equal votes as directors or as shareholders. Worse, Bill suspected that Tom was setting up a new shop with one of the Archers, and went to see a solicitor to stop him. He found to his horror that

  •  He couldn’t instruct the solicitor on behalf of the company (which would have numerous claims against Tom);
  •  He couldn’t take action himself as he had no claims;
  •  Tom had terminated his guarantee to the bank and they had frozen the company’s account so he couldn’t pay the rent or the staff or the suppliers;
  •  Tom was notifying customers that Archer’s Bakery was opening shortly and seeking orders for them.

All Bill could do was petition to wind up the company (which he didn’t want to do, and which would take months anyway) or get involved in really complicated court proceedings involving s994 Companies Act 2006 which were likely to last 12-18 months and cost £50,000+. It was a disaster.

The Answer

Curtains for Bill & Tom’s Bakery. Equality was not enough. If only they had protected themselves against deadlock by either entering into a shareholder’s agreement giving rights directly to the shareholders, or by giving a small number of shares (say 5%) to a trusted adviser, who could resolve the crisis by outvoting one or the other of them.

Do remember that no amount of fancy arrangements are worth anything if the parties can’t afford to enforce them. And this is a pretty basic sort of problem, that happens in real life as well as on radio. So be prepared.