Company director, payments and conflicts of interest
Discussion
Hi,
A question that I need advice on.
I am a shareholder in a small company. The company has two directors. One of the directors is claiming that they have done work for the company and is demanding payment for that work. (The work has been done but there was an agreement between the directors that no remuneration would be given for the work. The agreement was 20 years ago and - of course - verbal.)
The director in question is demanding payment for this work before proceeding with other aspects of the business which need to be dealt with. He won't state the details of what work has been done nor how much he wants to be paid but has made it clear in writing that unless he is paid 'sufficiently' then he will not make decisions that need to be made for the company business to progress. He says that the payment 'is on the critical path' for the business.
He is trying to claim the payment in a personal capacity - not as the director of another business.
My understanding is that this is illegal under the Companies Act.
- A director is obliged to act in the best interests of the company
- A director may have no say or vote on matters concerning other parties in which he has an interest
The company was incorporated over 40 years ago and the Mems and Arts are silent about matters such as these.
I'm happy to give more details but am also happy to have an off-line chat if it helps. Should this develop further then I may well find myself needing formal advice, which I would be happy to pay for (but I hasten to add that we are not at this stage yet).
Any advice on what to do would be welcomed! Thanks.
A question that I need advice on.
I am a shareholder in a small company. The company has two directors. One of the directors is claiming that they have done work for the company and is demanding payment for that work. (The work has been done but there was an agreement between the directors that no remuneration would be given for the work. The agreement was 20 years ago and - of course - verbal.)
The director in question is demanding payment for this work before proceeding with other aspects of the business which need to be dealt with. He won't state the details of what work has been done nor how much he wants to be paid but has made it clear in writing that unless he is paid 'sufficiently' then he will not make decisions that need to be made for the company business to progress. He says that the payment 'is on the critical path' for the business.
He is trying to claim the payment in a personal capacity - not as the director of another business.
My understanding is that this is illegal under the Companies Act.
- A director is obliged to act in the best interests of the company
- A director may have no say or vote on matters concerning other parties in which he has an interest
The company was incorporated over 40 years ago and the Mems and Arts are silent about matters such as these.
I'm happy to give more details but am also happy to have an off-line chat if it helps. Should this develop further then I may well find myself needing formal advice, which I would be happy to pay for (but I hasten to add that we are not at this stage yet).
Any advice on what to do would be welcomed! Thanks.
Guys,
Thanks for the replies.
A little more detail: the company is proposing to split, with the two directors going their separate ways. The director in question is asking for this payment for work done in order to progress the split. What's the worst that could happen if the split doesn't go ahead? That's a slightly more complicated one to answer and the split would be advantageous to both directors, but the director who has done the work seems to think that this is some means of bringing pressure to bear.
Thanks for the replies.
A little more detail: the company is proposing to split, with the two directors going their separate ways. The director in question is asking for this payment for work done in order to progress the split. What's the worst that could happen if the split doesn't go ahead? That's a slightly more complicated one to answer and the split would be advantageous to both directors, but the director who has done the work seems to think that this is some means of bringing pressure to bear.
Simpo Two said:
Seems odd he would suddenly start demanding payment after 20 years...
Maybe he's a bit skint and thinks this is a quick/free way to pillage some cash?
This is exactly the case as far as I can tell; he simply wants a handout to make things happen, and putting the label 'remuneration for work done' on it is convenient. He's never asked for payment previously nor was there any agreement that he should be paid. Maybe he's a bit skint and thinks this is a quick/free way to pillage some cash?
Your interpretation of company law matches mine in that.....
a) Demonstrate that the work he did benefited the company
b) That the work was needed
c) Provide evidence of what work was done and
d) that the fees represent a fair market value for that work.
If he can tick all those boxes, he has a claim.
What you've described sounds to me like - as Simpo says - he's just trying to hoover up some cash. That would put him in breach of the rule on acting in the best interests of the company and (I believe) provide grounds to remove him as a Director.
Demanding payment for not having done any work is also illegal.
But, if it's only a few £k and the company has the money, as painful as it may be you might be better paying him and closing the issue down so you can move forward. I don't say that lightly or flippantly but this could get very messy and end up costing you more than a golden f
k off.
Good luck
2Btoo said:
A director is obliged to act in the best interests of the company
So for his claim for payment to be valid, the onus is upon him to:a) Demonstrate that the work he did benefited the company
b) That the work was needed
c) Provide evidence of what work was done and
d) that the fees represent a fair market value for that work.
If he can tick all those boxes, he has a claim.
What you've described sounds to me like - as Simpo says - he's just trying to hoover up some cash. That would put him in breach of the rule on acting in the best interests of the company and (I believe) provide grounds to remove him as a Director.
Demanding payment for not having done any work is also illegal.
But, if it's only a few £k and the company has the money, as painful as it may be you might be better paying him and closing the issue down so you can move forward. I don't say that lightly or flippantly but this could get very messy and end up costing you more than a golden f
k off.Good luck
StevieBee said:
But, if it's only a few £k and the company has the money, as painful as it may be you might be better paying him and closing the issue down so you can move forward. I don't say that lightly or flippantly but this could get very messy and end up costing you more than a golden fk off.
This.k off.Could you structure it as a "success fee" payable on conclusion of the company split?
Guys,
Thanks for those answers.
StevieBee, you clearly know more about this than I do (which is not at all hard!) You say that if all four of those points are proven then he has a claim. Is this affected by the fact that he started to do the work 20-odd years ago upon agreement that he wouldn't be paid, and in those subsequent 20 years then there has been no mention of payment?
It's not a trivial amount - the figure he seems to be hinting at is around the £180k mark, claiming that this is not unreasonable for 20 years work for him and his wife. This would be a substantial proportion of the amount that the other director (who is a smaller shareholder) would get in his part of the split. The other director is not unhappy about a goodwill payment of a couple of £k, and the idea of a 'success fee' is a very good one, thank you jeremyc, but is deeply unhappy about such a huge sum being demanded in what seems like an illegal way.
Thanks for those answers.
StevieBee, you clearly know more about this than I do (which is not at all hard!) You say that if all four of those points are proven then he has a claim. Is this affected by the fact that he started to do the work 20-odd years ago upon agreement that he wouldn't be paid, and in those subsequent 20 years then there has been no mention of payment?
It's not a trivial amount - the figure he seems to be hinting at is around the £180k mark, claiming that this is not unreasonable for 20 years work for him and his wife. This would be a substantial proportion of the amount that the other director (who is a smaller shareholder) would get in his part of the split. The other director is not unhappy about a goodwill payment of a couple of £k, and the idea of a 'success fee' is a very good one, thank you jeremyc, but is deeply unhappy about such a huge sum being demanded in what seems like an illegal way.
2Btoo said:
Guys,
Is this affected by the fact that he started to do the work 20-odd years ago upon agreement that he wouldn't be paid, and in those subsequent 20 years then there has been no mention of payment?
I'd await StevieBee's learned comment, but 20yrs of no payment is a very strong precedent and confirms the agreement you speak of.Is this affected by the fact that he started to do the work 20-odd years ago upon agreement that he wouldn't be paid, and in those subsequent 20 years then there has been no mention of payment?
2Btoo said:
It's not a trivial amount - the figure he seems to be hinting at is around the £180k mark, claiming that this is not unreasonable for 20 years work for him and his wife.
Have he and his wife received other remuneration over the 20 years - dividends and similar?Regardless, £180K is not a trivial amount and there clearly needs to be a mutual understanding over what exactly was agreed all those years ago (the lack of payment in the intervening time would seem to set a precedent). There might be an argument that had this in fact been a proper and valid agreement then these payments should have been accruing in the company accounts (in a Director's loan account or as a debtor).
Chaps,
More excellent answers, thank you.
jeremyc, there have been no dividends to be paid as there have been no profits made over the last 20 years. As you'll probably have guessed, the company is an old family company and the two directors are siblings, both now in their 70's. The assets of the company are arable property which has been let and the income has been miniscule, just about enough to maintain them in their current state. The director who is now demanding payment has 'managed' the company and the assets and has had his expenses fairly generously paid (which accounts for where a good proportion of the income has gone). This arrangement arises from a conversation between the two directors which took place after the passing away of their parents.
There are now moves afoot to split the company to allow the two sides of the family to take their share of the assets. The director in question is demanding the payment in order to proceed with the split. The demand has appeared as a "reimbursement for future tax liabilities should they arise", a "salary" and now a "Management Fee".
Thanks again everyone. This is all most helpful.
More excellent answers, thank you.
jeremyc, there have been no dividends to be paid as there have been no profits made over the last 20 years. As you'll probably have guessed, the company is an old family company and the two directors are siblings, both now in their 70's. The assets of the company are arable property which has been let and the income has been miniscule, just about enough to maintain them in their current state. The director who is now demanding payment has 'managed' the company and the assets and has had his expenses fairly generously paid (which accounts for where a good proportion of the income has gone). This arrangement arises from a conversation between the two directors which took place after the passing away of their parents.
There are now moves afoot to split the company to allow the two sides of the family to take their share of the assets. The director in question is demanding the payment in order to proceed with the split. The demand has appeared as a "reimbursement for future tax liabilities should they arise", a "salary" and now a "Management Fee".
Mr Pointy said:
For £180k the other director needs to fire a solictors letter back pointing out the issues that could arise should these claims continue.
Thanks Mr Pointy. If anyone could recommend a solicitor whom I could engage for this I would be interested to hear. Thanks again everyone. This is all most helpful.
If I understand it correctly, the work was done over 20 yrs ago.
If that is the case and he has not until now raised the point, nor any mention of this amount in accounts or ledgers, the debt may exist but it is most likely not enforceable, anyone including a company needs some certainty as to claims and if a claim isn't made in 6 yrs, except in extreme circumstances, it's not enforceable.
The fact he is a director undermines his position even more as he has a duty to portray the accounts in an realistic manner and he has not since for many years.
If that is the case and he has not until now raised the point, nor any mention of this amount in accounts or ledgers, the debt may exist but it is most likely not enforceable, anyone including a company needs some certainty as to claims and if a claim isn't made in 6 yrs, except in extreme circumstances, it's not enforceable.
The fact he is a director undermines his position even more as he has a duty to portray the accounts in an realistic manner and he has not since for many years.
Thanks Dave.
DaveA8 said:
If I understand it correctly, the work was done over 20 yrs ago.
Not quite - the work has been done over the last 20-odd years. It is ongoing and continues to this day. DaveA8 said:
If that is the case and he has not until now raised the point, nor any mention of this amount in accounts or ledgers, the debt may exist but it is most likely not enforceable, anyone including a company needs some certainty as to claims and if a claim isn't made in 6 yrs, except in extreme circumstances, it's not enforceable.
The fact he is a director undermines his position even more as he has a duty to portray the accounts in an realistic manner and he has not since for many years.
Even more helpful, thank you. The fact he is a director undermines his position even more as he has a duty to portray the accounts in an realistic manner and he has not since for many years.
2Btoo said:
Guys,
Thanks for those answers.
StevieBee, you clearly know more about this than I do (which is not at all hard!) You say that if all four of those points are proven then he has a claim. Is this affected by the fact that he started to do the work 20-odd years ago upon agreement that he wouldn't be paid, and in those subsequent 20 years then there has been no mention of payment?
It's not a trivial amount - the figure he seems to be hinting at is around the £180k mark, claiming that this is not unreasonable for 20 years work for him and his wife. This would be a substantial proportion of the amount that the other director (who is a smaller shareholder) would get in his part of the split. The other director is not unhappy about a goodwill payment of a couple of £k, and the idea of a 'success fee' is a very good one, thank you jeremyc, but is deeply unhappy about such a huge sum being demanded in what seems like an illegal way.
To be clear, my experience is based upon having faced similar situations and writing heads of agreements to counter the same.... rather than any 'actual' legal insight although because of these I do have some.Thanks for those answers.
StevieBee, you clearly know more about this than I do (which is not at all hard!) You say that if all four of those points are proven then he has a claim. Is this affected by the fact that he started to do the work 20-odd years ago upon agreement that he wouldn't be paid, and in those subsequent 20 years then there has been no mention of payment?
It's not a trivial amount - the figure he seems to be hinting at is around the £180k mark, claiming that this is not unreasonable for 20 years work for him and his wife. This would be a substantial proportion of the amount that the other director (who is a smaller shareholder) would get in his part of the split. The other director is not unhappy about a goodwill payment of a couple of £k, and the idea of a 'success fee' is a very good one, thank you jeremyc, but is deeply unhappy about such a huge sum being demanded in what seems like an illegal way.
The first thing to note is that unless anything has changed, you cannot issue an invoice for work done more than six years ago unless with explicit agreement of the company you're billing. So he's put his marker in the sand valuing his work at £9k a year. Assuming the work can be verified as having been done then that would put a ceiling on what he can expect to claim at £54k.
What I don't understand is why he wants to claim the money via invoicing for work done. I would have thought that the sale of shares would be more tax efficient for him. On which.....
You can't really split a company in two. You can have company A (the existing company) with one of the two existing shareholders having 100% of the shares and company B (a new company) set up and owned 100% by the other, previous shareholder of company A.
So if company A is owned by two shareholders with, say a 20/80 split of ownership one would have to buy the shares of the other. So if this chap was seeking payment for his shares then I'd say fair enough. But for whatever reason, that doesn't seem to be the case and on the basis of what you've explained, I cannot see any court finding in his favour.
All parties need to be a bit careful, matters are as they are, that is over 20 yrs no claim has been made for any money, you can't simply back engineer it and think that's the end of it.
If he did earn £9000 in 2001, then some tax was due on that and being Pistonheads, he'll be a higher rate tax payer, HMRC would likely claim they are owed that money and interest and fines for non reporting, that may fall on the recipient but it's not unknown for them to question payments to Directors especially if for example it was to avoid NI, I know dividends etc exist but lots of companies do run NI for directors.
its a bit rich the recipient asking for indemnities, he should be offering them instead.
If he did earn £9000 in 2001, then some tax was due on that and being Pistonheads, he'll be a higher rate tax payer, HMRC would likely claim they are owed that money and interest and fines for non reporting, that may fall on the recipient but it's not unknown for them to question payments to Directors especially if for example it was to avoid NI, I know dividends etc exist but lots of companies do run NI for directors.
its a bit rich the recipient asking for indemnities, he should be offering them instead.
When I did work as a director for one of my businesses, for which I was not paid, we reported the fact in the company accounts.
This was done by way of valuing it as a director's loan to the business to the value of what I would have been paid had I been salaried.
If they haven't done something like that I can't see he has a leg to stand on.
This was done by way of valuing it as a director's loan to the business to the value of what I would have been paid had I been salaried.
If they haven't done something like that I can't see he has a leg to stand on.
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