Director disputes: paths to resolution

30 April 2024

Chris Bristow from Scotland Liquidators explores what happens when one director wants to liquidate a company and the other does not…

There may come a time when a director decides they no longer wish to continue running their business; this could be due to impending retirement, a lack of passion for the business, or simply a desire to move onto a new venture.

In many cases, this is relatively simple to achieve by placing the now unwanted company into a liquidation process; either an MVL if solvent, or a CVL if the company is insolvent. This will allow the director to extract any profits retained in the business (if applicable), ensure any outstanding creditors are treated fairly, and bring the company and any loose ends to an orderly end.

It is not so simple, however, when the company has a co-director who does not share the same desire to cease trading. So, what happens when a stalemate is reached whereby one director wants to liquidate the business and the other wants to continue trading?

Negotiations and mediation

As with most things in life, if you are able to keep matters out of court and are able to come to a mutually-agreeable outcome through a process of negotiation, this is likely to be the best strategy. Not only will this save time and expense, but also a great deal of stress.

If the company is solvent, the best option for all concerned may be for the party who wants to continue trading to buyout the director who is keen to depart if finances allow. It is advisable for an independent valuation to be obtained to ensure both parties are treated fairly during the sale.

Professional mediation can be considered as a midway point between informal negotiations and legal action; it can be used to iron out any contentious elements of a proposed buyout strategy or employed when communication has completely broken down between both parties.

Enlisting the services of an impartial mediator will ensure each party gets their say and their opinions taken into account. With no agenda or bias, a mediator will work towards resolving the dispute, however, they will not make a decision as to the company’s future, rather their role is to open up the channels of communication between the disputing parties and encourage them to reach an agreement between themselves.

Resolution through litigation

If the situation is beyond the point of mediation, or mediation has ultimately failed to resolve the dispute, there may be no choice but to seek a decision from the courts to allow all parties to move forward.

If the company is insolvent, unable to pay its liabilities, and the debts of the company are continuing to rise, a director is able to petition the court to have the company wound up if they are also a creditor. This is the same process a creditor would go through to force an indebted company into compulsory liquidation, it just so happens that it is a director submitting the winding up petition in this case rather than a third-party creditor.

A director initiating winding up proceedings against their own company does not require the consent of any other director and it will be left for the courts to determine whether the company should be forcibly wound up. Bear in mind that there are significant costs involved in petitioning to wind up a company, however, as a last resort it is often a viable option.

The courts will need to ascertain whether the company is indeed insolvent. If the company is unable to meet its liabilities as and when they fall due, then the business will be deemed insolvent and the court can order for the company to be wound up and placed into compulsory liquidation.

Whether the answer is negotiations, mediation, or litigation, directors must ensure they are prioritising the interests of the company and its creditors during times of disagreement. If the company is insolvent, directors will be in breach of their legal obligations should they not do all within their power to shield creditors from any further losses. When a stalemate situation threatens to overpower doing what is best for the company and its creditors, swift action needs to be taken to resolve the dispute one way or another.

About the author

Chris Bristow is a senior insolvency expert at Scotland Liquidators. Chris has vast experience of assisting company directors and sole traders with all manner of financial and operational problems.