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Director Disputes – can a Liquidation or a Voluntary Administration help?

Director Disputes – can a Liquidation or a Voluntary Administration help?

April 17th, 2015 : by Cliff Sanderson

Ahh yes.  Directors’ disputes.  I’ve had a few of those in my time.  And at Dissolve, we would receive at least a phone call a week asking whether a Liquidation or a Voluntary Administration can be used to resolve a director or shareholder dispute.  The answer is “yes, sort of” but of course there are two things we always point out to the callers:

  1. an appointment of a Liquidator or Voluntary Administrator usually requires the agreement of the disputing parties (there is an exception); and
  2. it’ll be expensive, so you will be a lot better off if you can resolve it without using lawyers and insolvency practitioners.

So let me run through some of the practicalities.

Appointing a Provisional Liquidator

So it is possible for a party who is unhappy about the operation of a company to apply to Court to have a Provisional Liquidator appointed.  It is a burdensome process though as the aggrieved party has to gather information that can be put before a Judge explaining why it is a good idea for the Court to appoint a Provisional Liquidator to take control of a business.  The primary purpose of a Provisional Liquidation is preservation of the status quo.  The appointment suspends the powers of the directors and the Prov Liq steps into the shoes of the directors to run the business, assess options and then, usually, report back to the Court on available options.

The main advantage of a Prov Liq is that it is not by agreement of all parties – so if the directors can’t agree on the day of the week, an aggrieved director can explain it all to a Judge who will make a decision.  It does not need the agreement of all directors and shareholders.

But the big catch is the cost.  The one seeking the appointment will need a Lawyer to prepare the application to Court – I haven’t been involved in one of these for a few years so I am not speaking with recent authority, but I would be surprised if it could be done for under $20,000 in lawyers fees.  And then there is the fees of the Insolvency Practitioner, who acts as the Prov Liq.  Commonly, where a Prov Liq is appointed, it is for a trading business.  Therefore the Prov Liq will need to monitor and run that business.  Fees will inevitably be high.

So Provisional Liquidation is a solution in situations where there is a dispute regarding a trading business, but due to the high costs, the business itself would need to be fairly large or the costs may crush it.

Appointing a Voluntary Administrator

A VA can be appointed where a company is, or may become, insolvent.  So that is the first thing a director needs to think about.  The VA regime is not designed to solve a director dispute.  It is there to rescue insolvent companies.  Of course, director disputes and insolvency of the company will often coexist.  The advantage of a VA is that the appointment of a VA is easy, being simply a formal Resolution of a majority of directors, but that is also the trap – a majority of directors must agree to the appointment.  And, to avoid any doubt, one of two directors is not a majority! Most of the enquiries we receive would be in a situation where there are two directors, and they are not agreeing on much at all.

Having said that, in circumstances where there is a director dispute and the company is potentially insolvent, but the directors can agree that something has to be done, then VA is a good option.  It can still be expensive in terms of VA Fees but it avoids the extra costs of Court applications.

Voluntary Liquidation

In this context, we are talking about the appointment of a liquidator by way of a Creditors Voluntary Liquidation.  A CVL is kicked off by a simple Resolution of the Directors and then a Resolution of shareholders.  This approach is most appropriate for a company that is clearly insolvent and the need is for an independent party to take control and finalise matters.  It is not well suited to a trading business (for a trading business a VA is a much better option).  But you will have spotted the trap – it needs the agreement of the directors and then the shareholders.  The shareholders resolution can be pushed through without the agreement of all shareholders but it is a Special Resolution and so it needs 75% of shareholders who vote to vote in favour.

So the above options can provide a way forward.  You will also appreciate that all of the options are somewhat clunky and costs will be substantial.  Unfortunately, there is no magic pill to solve a directors dispute.

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