In the company arena, it may be that directors or shareholders take the view that another director is not running the company advantageously or in accordance with his duties or a shareholder may consider that the company in being run in a way that is unfairly prejudicial to his interest.
In the partnership arena, one partner may feel that another is not contributing to the partnership either in terms of time or financial returns.
In the joint venture arena, one company may take the view that another is not performing its obligations under the venture.
Where there are documents in place regulating the relationships, one party may seek to rely on any contractual provisions contained therein and the other party will be unable to argue the lack of provisions, although he or it may say there is no breach. Where there are no documents regulating the relationship, the parties will likely seek to argue an oral agreement or imply matters which have been agreed. This inevitably leads to disagreement.
Whether or not there is a Director’s Service Contract, which will set out the Directors duties, obligations and rights; a Director should always act in the best interests of the company, must not compete with the company and must not seek to make a secret profit from the company. In addition to director’s duties which may be included in a company’s Articles, there are Statutory Duties set out at Sections 170 to 177 of the Companies Act 2006. If a director does not act within these bounds then the Shareholder’s/Company may seek to remove a director from his position and if the company has suffered loss (for example because the director has competed and made a secret profit), the company can sue the director to recover the monies.
In the absence of a Director’s Service Contract or Shareholder’s Agreement restricting/preventing a Director or Shareholder from competing with the Company (“restrictive covenants”), the company will not be able to prevent a director from competing with a company once he has been dismissed. See further, [link to Restrictive Covenants FAQ in commercial drafting page].
Quite often in the case of a private limited company a director of a company may also be a shareholder, but not all shareholders will be directors. A director is vested with the day to day running of the company. A director owes a Company statutory duties, particularly to promote the success of the company. Since the company is owned by its shareholders, in effect the director must promote the success of the company for the benefit of its shareholders. If you believe a director is running the company in a way which unfairly prejudices your interest as a shareholder then you can apply to the Court under Section 994 of the Companies Act 2006 for the Court’s protection. The Court has various powers under Section 996 of the Act including requiring the company to refrain from doing or continuing an act complained of or to do an act that you have complained it has omitted to do or provide for the purchase of the shares of any shareholder by another shareholder(s).
In the absence of a Partnership Agreement setting out the duties, rights and obligations of the partners, then the partnership is governed by the ancient Partnership Act 1890. This regulates how a partnership will be run, including the expulsion of a partner and the termination of the partnership. If there is a Partnership Agreement, this should contain provisions regulating the partnership and how matters of dispute are to be dealt with. We can advise you as to your options either under any partnership agreement or under the terms of the partnership act 1890. If the relationship has not irrevocably broken down we would invite your partner to improve his performance but if you feel that the relationship has broken down or there is no improvement we would seek to bring the partnership to an end, ideally on agree terms in the first instance, and only resort to litigation if this was not achievable.
Unfortunately in a partnership, partners are jointly and severally liable for partnership tax so that if your partner has failed to pay tax on his share of partnership profits, you can be made to pay these taxes. However, you can then seek to bring a claim against your partner for an indemnity for the tax you have had to pay on his behalf. If there is a Partnership Agreement, such an indemnity will normally be included within the Agreement but an indemnity can still be claimed in the absence of the same.
Normally, there will be provisions as to the transfer of shares in the company’s Articles. These may not be particularly wide. If there is a pre-emption clause requiring a shareholder to first offer his shares to the other existing shareholders, then he can be prevented from selling his shares to a third party without first complying with the pre-emption clause. If there is a Shareholders Agreement, it is possible that there will wider provisions as to the sale of shares which must be followed by a shareholder wishing to sell shares. If the shareholder does not follow these provisions proceedings can be commenced to prevent the shareholder from selling this shares to a third party without first following the procedure in the Shareholder’s Agreement. Further the company can refuse to register any third party who acquires such shares (without the other shareholder’s consent) as a shareholder.