What Should I Do if I Fall Out With My Business Partner?

Disagreements between business partners are common, and they are often intensified if your partner is a friend or family member. If or when you fall out, there are a few options to consider depending on the severity of the problem.

In this post, company formation agent, Rapid Formations, suggests the steps business partners can take when they have fallen out. They will explain the role of legal contracts in these situations such as the Articles of Association, how to transfer shares if a partner chooses to leave, and how to close a limited company if both partners fail to reach a compromise.

Possible solutions to falling out with your business partner

Depending on the nature of the disagreement, there are several options for resolving conflicts between business partners. If it concerns the sale of shares, for example, a shareholders’ resolution may suffice. But some cases can be more final and its simply time to go your separate ways.

Below are some of the steps you could take if you have fallen out with your business partner:

Check your Articles of Association

In the first instance, consult your company’s Articles of Association if you have fallen out with your business partner. Your articles are the written rules about how your company is managed. They outline what the shareholders’ rights, responsibilities, and liabilities are as well as how decisions are made.

You should refer to these provisions to settle manageable disputes. In other words, minor disagreements that can be resolved using your company’s formal procedures.

Check your shareholders’ agreement

If the conflict is more problematic and cannot be handled by your articles, another option is to check your shareholders’ agreement. This is a supplementary document to your Articles of Association, used to solidify additional rules regarding business partnerships.

It is a legal contract between two, some, or all partners that manages your professional relationship(s) and sets out your obligations as shareholders. Another key purpose of a shareholders’ agreement is to lay out the rules around dispute management.

If you have a shareholders’ agreement in place and you have fallen out with our business partner, the next port of call is to check its terms regarding how the conflict should be resolved. It should contain details such as where resolutions are to take place, who has the final say, and the appointed mediator (if applicable).

For more intense disputes, your shareholders’ agreement should also explain how to manage a deadlock if you cannot reach a reasonable settlement. Especially if there are only two shareholders in your company or you have a personal relationship with your business partner, deadlock provisions are crucial to make sure that you overcome these hurdles and your business continues to grow.

Transfer your shares

In the event that you cannot continue working together after falling out with your business partner, another option is for one of you to sell or transfer your shares and exit the company. One may either buy the other one out, or shares may be transferred to existing shareholders or to new investors.

First and foremost, share transfers are governed by part 17 of the Companies Act 2006 and your company’s articles.

If you also have a shareholders’ agreement, you should exercise the provisions set out in this document regarding the members’ individual rights and duties. For instance, you may need to give notice before actioning a sale, or some shareholders may have pre-emption rights.

To transfer your shares, you should start by filling out a Stock Transfer form. Essentially, this logs the number of shares being transferred, the amount being paid for them, and the name(s) of the new holder(s).

If the transfer value exceeds £1,000, your Stock Transfer form must be reported to HMRC and the new shareholder will need to pay Stamp Duty tax at 0.5% of the total sale value. You can find more information on share transactions and tax on the gov website.

Next, you must obtain the approval of the remaining shareholders using a board resolution, after which your Register of Members is updated. Here, you register the transfer and add the new owner’s details.

Finally, issue a share certificate to the new shareholder and notify Companies House about the share transfer via a confirmation statement. You do not have to do this immediately, but generally, it is advised to do so as soon as possible so that the most up-to-date information can be reflected on the public register.

Close the company

The worst-case scenario, if you and your business partner can’t reach a compromise, is to close the company and go your separate ways. There are several ways to do this depending on your company’s health and circumstances.

1. Voluntary strike-off

One option is to strike off your limited company from the Companies Register. This is also sometimes referred to as ‘dissolution’. According to the gov website, you may strike off your company from the register if it:

• Has not traded in the last 3 months
• Has not changed its name in the last 3 months
• Is not threatened with liquidation
• Has no agreements with creditors

To dissolve your limited company, you must first close it down legally. This involves notifying the shareholders and HMRC, treating your employees accordingly (e.g. issuing redundancy pay), and settling your liabilities such as selling your assets, repaying creditors, and closing bank accounts. If there are any remaining assets when your company is struck off, they will automatically pass to the Crown.

Next, you can apply to strike off using a DS01 form. Online applications cost £8 and paper applications cost £10. Once Companies House has received your application, your company will be struck off the register within 2 months, given that there are no public objections, and your form has been completed correctly.

1. Liquidation

Also known as ‘winding up’, you may liquidate your limited company if it is insolvent. This means that the company is financially unfit and unable to pay off its debts.

If you choose to liquidate, the majority of shareholders must agree first. You need to obtain approval to wind up using a special resolution, which requires at least 75% of votes in favour. The resolution may be held in the form of a general meeting or using a written resolution. If you opt for a meeting, make sure you take detailed and accurate minutes as they will need to be sent to Companies House.

Once you have this approval, you need to:

1. Find an insolvency practitioner to action liquidation.
2. Send the resolution to Companies House within 15 days
3. Place a notice of the resolution in The Gazette (official public record) within 14 days

You then need to ask the court to liquidate your limited company using form Comp 1 (the application itself), form Comp 2 (a confirmation of your application’s details), and your shareholders’ resolution.

To submit your application, you need to check how much paid-up capital your company has. Paid-up capital is the value of the shares that have been paid for in full by shareholders. If your paid-up capital is £120,000 or more, you should submit your court application online.

If it’s under £120,000, you’ll first need to find your nearest court or tribunal that handles limited company liquidation. You can then follow the online application process as above if your nearest court is one of the below:

• Admiralty and Commercial Court
• Chancery Division
• Companies Court
• High Court
• London Mercantile Court
• Rolls Building

If your nearest court is not on this list, you need to submit your application by post. There is an application fee of £2,600, followed by £280 for the court hearing.

Once your petition is received and accepted, you’ll receive a date for the hearing. Before this date, however, you must serve a copy of the liquidation petition (certificate of service) to your company and publish a notice in The Gazette at least 7 days before the hearing, along with copies of both.

Finally, at the hearing, if the court agrees to liquidate your company, an order for this will be sent to your company’s registered office.

Liquidating your limited company can be a suitable resolution to your dispute. For instance, If you fall out with your business partner over the company’s financial health and you can no longer work together to revive it.

Make your limited company dormant

Alternatively, you can make your company temporarily inactive if you want to close it for now but think you may want to trade again in the future. This is called making your company dormant.

Your company qualifies as dormant once it has ceased significant trading in the financial year. This includes:

• Filing Companies House fees
• Paying penalties for late account filings
• Buying shares during incorporation

If your company hasn’t conducted such business, it becomes dormant. It’s important to note, however, that you may still need to file some documents while your company is inactive.

Depending on the company size, you may need to file both dormant as well as audited annual accounts. You will also still be required to submit your confirmation statement (for a £13 fee).

Making your limited company dormant could be a suitable solution for the short term if you fall out with your business partner. It allows you to temporarily cease trading and reactivate the company in the future if you wish – possibly with a new business partner.

Seek professional advice 

Business disputes can get extremely complicated, especially if you choose to close the company or if you fall out on hostile terms.

To make the settlement as hassle-free and fair as possible, you should seek professional advice from a corporate lawyer or accountant. They will be able to assist you not only with the legalities but they will also act as a mediator, which could be useful for reaching a mutually agreeable solution and keeping both parties’ best interests in mind.

Summary

If business partners fall out, there are various solutions to consider. If it’s something that they can work through, it may suffice to refer to the company’s articles or shareholders’ agreements for guidance. However, if these contracts don’t offer a suitable resolution, the only feasible step might be to close the company.

Either way, business disputes are stressful, time-consuming, and complex. So, it’s always best to seek professional advice who can help find the best resolution and make sure the correct laws and regulations are adhered to.

Rapid Formations is a top-rated company formation agent in the UK. Their services include company registration, opening a business bank account, and compliance. Formation packages start at just £12.99, with options suitable for limited companies, non-residents, Scottish companies, companies limited by guarantee, and limited liability partnerships (LLPs). Visit the Rapid Formations website to find out more about their company formation services.

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