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If a boardroom dispute arises between the directors of a company that affects the running of the business, it is vital to resolve this as quickly and as smoothly as the legal position of the company allows. Failure to do so can damage the ability of the business to operate efficiently, and may affect the firm's reputation if the dispute becomes public.
It is not uncommon for company shareholders and/or directors who hold equal shares to find themselves in a ‘deadlock’ situation, unable to resolve a dispute or carry on trading.
JMW’s expert solicitors can provide advice and guidance on how to proceed through negotiations while finding a solution that works for you and other parties involved in a dispute.
How JMW Can Help
Resolving disputes between directors, whether through negotiation or legal proceedings, is a specialism of the Director Services department at JMW Solicitors. Our partner-led team has a successful track record of negotiating and advising on senior executive terminations, severance agreements, and restrictive covenants.
We pride ourselves on providing cost-effective and efficient services, ensuring that a difficult situation is resolved without unnecessary delay. At JMW, we can draw on the expertise of colleagues from relevant departments where complexities in specific cases make this necessary.
While resorting to court proceedings to resolve director and/or shareholder disputes should be the last resort, we can assist with negotiations, with a view to working together in the future. Alternatively, if the deadlock cannot be resolved, we can assist with the winding up of the company.
Resolving a Boardroom Dispute
The resolution of such a director dispute will involve finding either an amicable solution or removal of one or more of the directors in dispute. In either case, it is necessary to establish what the legal position of the firm is, which depends on a complex area of the law and on the internal regulation of the company itself.
The articles of association of a company should set out the processes through which a director may be dismissed, but this must be examined together with the director’s service agreement. Both must be considered in the context of the relevant legislation, such as the Companies Act 2006, and the potential that the director to be removed may be due compensation for unfair dismissal.
The complexity and antagonism involved in this method may lead to a drawn-out process that, while legally accurate, continues to damage the interests of the business until the eventual conclusion of the dismissal. In many cases, it is wiser to negotiate a solution that satisfies both sides of the argument or, when that is not possible, one that allows one side to withdraw from the business under an arrangement which appropriately recompenses that withdrawal.
Evaluating the arrangement as appropriate, too, depends on an understanding of the legal position of both sides within the law, the company's articles, and the contractual terms under which the director was recruited to the board.
What Happens in a Deadlock Situation?
In these circumstances, a winding-up petition can be presented on the grounds that it is just and equitable to do so, or a director wishing to remain can buy the shares of a departing director.
An application can be made to the court for an unfair prejudice order on the grounds that the
company’s affairs are being or have been conducted in a manner that is unfairly prejudicial
to the interests of shareholders generally, or that an actual or proposed act or omission of the company is or would be prejudicial.
A common example of unfairly prejudicial conduct is a breach of duty by a director, for instance, misappropriation of company assets, which results in a breakdown of the relationship of trust and confidence between the directors and/or shareholders.
Directors whose relationships have irrevocably broken down may elect to voluntarily wind up
the company. There are three types of liquidation:
- Members’ Voluntary Liquidation (MVL) - the directors declare the company is solvent and put it into liquidation and all the company debts are paid in full
- Creditors’ Voluntary Liquidation (CVL) - the directors determine the company is not viable and put the insolvent company into liquidation
- Compulsory Liquidation - usually brought by company director(s) where shareholders will not agree to a CVL, the insolvent company is wound up by the court on presentation of a winding-up petition
Should there be assets in the liquidation, existing directors, shareholders and third parties may, through the liquidator, bid for the assets of the company, such as office equipment, stock and the company name. The duties owed by a director to the company and its creditors survive the company’s entry into liquidation and so directors must ensure that if they buy back assets from the insolvent company they do so at market value.