When a company reaches the end of its trading life with assets to distribute, the process should be straightforward. Sell the assets, pay the creditors, distribute the surplus. But what happens when the two directors can't agree on how that surplus should be divided, and trust has broken down to the point where each suspects their advisors of bias?
This case study examines a situation where a solvent liquidation became complicated by an entrenched dispute between two director-shareholders, with a third shareholder also affected by the outcome.
Even Keel Solutions was instructed several months before a company commenced its solvent liquidation. The brief was to provide advice on the sale of the company's intellectual property and assets and help resolve some loose ends relating to shareholder agreements.
The company had two directors who were also shareholders, plus a third non-director shareholder. A potential buyer had been found for the IP and assets and a sale price in excess of £1m was anticipated. This should have been a positive outcome for everyone involved.
However, the relationship between the two directors had deteriorated significantly, and several factors complicated what should have been a simple distribution:
• A fundamental lack of trust between the two directors
• Concerns that the accountants (and potentially Even Keel Solutions) were favouring one director over the other
• Disagreements about what had actually been agreed between the parties regarding the eventual distribution to shareholders
• Reliance on verbal agreements and incomplete written documentation
• Outstanding claims for unpaid salary, expense claims and EMI shareholder options that differed between the directors
Like many small businesses, this company had operated on a mixture of formal documentation and informal understandings. Verbal agreements between the directors about various matters had never been properly documented.
This created an environment where each director genuinely believed they were entitled to specific amounts, but there was insufficient evidence to definitively prove what had been agreed. As the liquidation approached, these unresolved issues moved from background concerns to active disputes.
As the process progressed, conversations between the two directors became increasingly difficult. Initially, both directors attended meetings together. However, these joint meetings became less productive over time. The crucial differences of opinion were often left unspoken in group settings, with both directors reluctant to raise contentious issues face to face.
The business had essentially ceased trading, simplifying operational concerns. However, the premises were maintained for a significant period, requiring delicate conversations with landlords. Outside of the directors’ dispute, the main concern from our perspective was managing creditor relationships, keeping them informed of the ongoing sale process to minimise the risk of legal action before the sale of IP and assets was concluded.
It became clear that the traditional approach of joint meetings wasn't working. Rather than continuing to force both directors into increasingly unproductive group discussions, Even Keel Solutions adopted a split mediation approach:
• Individual phone and video calls with each director to understand their concerns and positions
• Separate email correspondence that allowed both parties to express their views more candidly
•Creation of a detailed discussion document that set out each contentious issue and provided an objective assessment of the relative merits of each position
•Collaboration with the company accountant to produce scenario modelling showing the tax implications of different potential settlement options
This approach proved far more productive. By removing the pressure of face-to-face confrontation, each director felt more able to discuss their genuine concerns and bottom lines without losing face in front of the other.
Whilst both directors continued to sit in on numerous meetings until the very end of the process, the crucial differences were often left out of those conversations.
We suggested professional mediation at one point, but both directors agreed they trusted Even Keel Solutions enough to fulfil that role. This trust, despite initial concerns about bias, proved well placed.
Two or three of the main differences were resolved relatively quickly once historic evidence or contemporaneous advice from solicitors and accountants provided clarity. These issues, whilst important, weren't the core problem.
The main point of contention ultimately revolved around the benefit each of the three shareholders would receive. This had been broken down into various claims and differences related to unpaid salary, expense claims and EMI shareholder options. Each director had their own calculation of what they were owed, and reconciling these proved extremely difficult.
Following several difficult weeks of negotiation, the breakthrough came from reframing the problem. Rather than attempting to value and agree each separate element (which had proved impossible), a simpler solution was proposed: a re-division of the shareholding that reflected the overall value each party deserved/found acceptable.
By moving away from line-by-line arguments about individual claims and instead focusing on the final outcome, agreement became possible. Each party could accept the overall settlement without having to concede specific points that had become matters of principle
The process took 10 to 11 months from start to resolution. Once agreement was reached between the directors, approximately £900,000 was distributed between the three shareholders after all creditors were paid in full.
At various points during the process, different parties came very close to instructing solicitors or pulling out of the proposed proceedings entirely. The successful resolution meant that whilst no party received everything they felt they were entitled to, all were satisfied enough to proceed. All three shareholders expressed genuine gratitude that the matter had been brought to a successful conclusion without descending into costly litigation.
Difficult conversations are easily avoided. Sometimes, in the moment, it genuinely makes sense to decide to deal with an issue later. However, the longer that goes on, the more difficult it often becomes to raise matters again and reach agreement.
In this case, there were several issues that looked insurmountable at times. Frank and honest conversations eventually enabled a successfully negotiated outcome. But it was hard won, precisely because both directors had become entrenched in their positions over time.
Traditional mediation often assumes that getting parties in a room together is the best approach. This case demonstrated that sometimes the opposite is true. The separate conversations allowed for more candid discussion of positions and concerns than the joint meetings ever achieved.
When you're advising clients in dispute situations, consider whether joint meetings are actually helping or simply providing a forum for positions to become more entrenched.
The breakthrough in this case came from abandoning the attempt to value individual claims and instead focusing on the overall outcome. Sometimes the structure of the negotiation itself creates the impasse.
When clients are stuck arguing over detailed calculations or specific entitlements, stepping back to consider the bigger picture can provide a path forward that detailed analysis never will.
Getting matters resolved sooner rather than later is almost always the better approach. Sometimes parties need to concede on some points to enable a way forward. Both directors in this case were eventually able to recognise that, and a middle ground was found.
Bringing in a mediator early can be far less costly than the potentially rancorous legal battles that can ensue if matters are left to fester. In many situations, an independent professional mediator can provide the neutral ground needed for resolution.
The reliance on verbal agreements and incomplete documentation was a significant contributing factor to this dispute. Whilst perfect documentation can't prevent all disagreements, it does provide a reference point that makes resolution far easier.
From a creditor perspective, this case had a positive outcome. All creditors were paid in full from the asset sale proceeds. For the shareholders, whilst the process was longer and more stressful than necessary, the final outcome preserved the full value available. Had the matter descended into litigation, legal costs could easily have consumed a significant portion of the £900,000 available for distribution.
This case demonstrates how insolvency practitioners can provide value beyond the technical aspects of liquidation. The Even Keel Solutions team's approach combined understanding of director dynamics, mediation skills and practical problem-solving to achieve an outcome that satisfied all parties.
When you're advising clients who are approaching the end of a business venture, particularly where there are disputes between directors, early referral to an experienced insolvency practitioner can help identify and resolve conflicts before positions become entrenched. The cost of that early intervention is invariably less than the cost of resolving matters once litigation becomes the only remaining option.
For more information about resolving director disputes in solvent liquidations, contact Even Keel Solutions.
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