The legal myth that we are busting today, is about who owns a company. I’m doing this myth because one of my clients and her partner, who by the end of the sad story, was her ex-partner, were in business together. She was the Sole director and they were both equal shareholders. She thought because he was a shareholder, he was required to help run the business.
That was not in the shareholder’s agreement, there was nothing in the shareholder’s agreement which required him to do anything. Because he was a shareholder, any profits that the business made, half went to him. So, they had a little bit of a personal struggle, and they ended up no longer being romantic partners. Initially, they both worked in the business 50/50, which was fine, but when they split up, he didn’t help in the business anymore, and she was left running the whole business. Trying to do everything herself and not having enough people to help her.
So, if you’ve got people who you’re in business with, however you structure the business and you expect them to put certain hours into the business, make sure you’ve got it written down and everyone has agreed to it in writing. So, that was the first problem, she couldn’t make him help her in the business. The second problem was that even though he did nothing in the business, because he was a joint shareholder or a 50% shareholder, he got 50% of the profit. But, as a shareholder, he had none of the responsibility, while my client, who was the director, had all of the responsibility for the business.
So, when they hit a financial rough spot, in which you have to act in the best interest of the company and you’re not allowed to trade while the company is insolvent. It’s the director’s responsibility to make sure that if the company can’t pay it’s debt and meet its obligations, that you speak to a liquidator and you get the company liquidated. You can’t keep trading if you’re going down the road to insolvent, well you virtually are insolvent, but you still just got the doors open. My client could’ve been personally liable if it was found that she was trading while insolvent. Plus, she had given a personal guarantee for the rent, and the business that they were running needed a big location, so the rent was very expensive.
Because he was a shareholder he had not signed a personal guarantee, but she had because she was a director. She thought they were 50/50 and everything that she was responsible for, he was responsible for. That turned out not to be the case, sadly she had to put the company into liquidation and she had to go through bankruptcy, personal bankruptcy herself. So that all of the debts, personal and business were solved, then she could start fresh. But there’s restrictions on her being a company director again within a certain timeframe.
So, the myth is that shareholders have an obligation to help in the business, which they do not. Even though they’re earning money from the business and the shareholders are responsible for some of the debts, they do not have an obligation to help in the business. Obviously, some of the company debts are for the company. But there’s certain taxes and debts incurred while trading insolvent, that the director is responsible for. So, become a company director, especially of somebody else’s business with the extreme caution.My name is Cathryn Warburton, I am the legal lioness and it has been amazing busting legal myths to protect your business, so that you can lead the lifestyle that you deserve.If you want to hear more about legal myths being busted, pop onto legallioness.com.