How to resolve Director disputes by means of external administration
Director disputes are rarely good for a company, especially one that’s facing financial hardship. They can delay (or even prevent) steps from being taken to get the company out of trouble, or at least minimise the damage.
One way of resolving Director disputes is by means of external administration—such as liquidation or voluntary administration. However, each method has issues that should be considered before making a final decision.
Let’s look at some of the options for resolving Director disputes.
The primary purpose of Voluntary Administration is to give the company the chance to continue operating—not to resolve a Director dispute. It’s suitable for a company that wants to keep trading and put forward a proposal to creditors that will allow it to restructure.
To appoint a Voluntary Administrator, the company needs to be either insolvent or likely to become insolvent. There also needs to be a formal resolution by a majority of directors, which in the midst of a Director dispute may be difficult to achieve.
Voluntary Administration costs are higher than they are for Liquidation due to:
- the strict timeframe imposed on the Voluntary Administrator
- the time needed to trade and monitor the company’s performance during the Voluntary Administration period.
Creditors Voluntary Liquidation
If a company is about to cease trading (or has already done so) and needs an independent third party to wind up its affairs, a Creditors Voluntary Liquidation may be the best option.
To appoint a Liquidator, the company needs to be either insolvent or likely to become insolvent. There also needs to be a resolution by directors, followed by a resolution of shareholders.
And this is where it can get tricky. While only a majority of directors need to vote in favour of winding up the company, 75% of shareholders need to vote in favour before it can be carried. And when the directors are also the shareholders (as is often the case with small companies), this can become an impossible task.
Unlike the other options, a Provisional Liquidator is appointed by an Order of the Court.
But making it happen can be an expensive process. As well as the legal costs of making the application to Court, there are also the costs of the Provisional Liquidator. And as the appointment is usually made to a trading entity, the Provisional Liquidator’s costs can be quite substantial.
The advantage it has over the other options is that not all Directors need to be in agreement. One or more Directors can make the application without the consent of the other Directors.
So which option is best for resolving Director disputes? There’s no real answer, as it largely depends on the circumstances surrounding the dispute.
If you’d like advice on what option would best suit your circumstances, or simply want to know more about solving Director disputes through external administration, get in touch with us today.