Director Looking For "exit Money"

C

Carols

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I set up a small business 4 years ago with another Director who has never worked a day in the business. I have money invested in the company and he has none. He now wants out but wants exit money.

The Company is not very profitable and showed a loss for last year and will show same again for this year. I have no money to give him, but he has not signed last years accounts and says wont sign this years either unless I give him 10,000 tax free.

I have no idea how to give this and I dont have it I would have to borrow to get rid of him.

I studiply put him down as a 50% share holder in the beginning.

My question is do I have to pay exit money and can I nominate a 3rd Director which would get me over the hurdle of having the accounts signed? any advice is greatly appreciated. Thank you.
 
You really need profesional (legal) advice on this.

The conditions under which directors can be apointed or retire are generally specific to the company. Also, the way in which shares can be issued, bought or sold. This could be in the company's "memo and arts" or possibly a shareholders agreement (if there is one).

I wouldn't worry too much about the directorship: the 50% shareholding is likely to be far more of an issue.

Best advice is to speak to a lawyer.
 
Thank you for the reply. I am just so worried at the moment as my accounts are due and he is refusing to sign them unless I pay up. I have a lot of money invested in the company and am there for the long haul but he has nothing. He does get some benefits as in a petrol card and his mobile paid but never wanted to work in the company just liked the idea of being a director and I needed an additional person at the time, so it semed like a good idea, now, technically I am being blackmailed. I would have thought if the co really has not got the money to pay then that should be it, but maybe not.
 


He ownes 50% of your business , get legal advise and try and buy him out cheap....
 
As far as I recall the 10000 tax free is allowed as compensation for 'loss of earnings'. Has he had any earnings over the years ? If not he is not entitled to claim the 10000 tax free.
What is your business worth ?
The unfortunate thing is that he is entitled to 50% of the net worth of the business as it stands.
 
26cb said:
As far as I recall the 10000 tax free is allowed as compensation for 'loss of earnings'. Has he had any earnings over the years ? If not he is not entitled to claim the 10000 tax free.
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Is this correct, even if he is a proprietary director? I'm not so sure...

Carols, as was suggested above, you need professional legal advice.
 
Hi the company is not worth much as it is currently paying off a big loan. when that loan is finished it then has to start paying off me as I have a huge amount invested in it. He just picked a figure of 10,000 out of the sky the company is not worth much as we are also on short term leases and there is no guarentee to say that the client will give us our leases back when they are up.

He has never had a salary - but has had his phone and a petrol card which I reakon have been worth about 14,000 to him so far over the past 4 years. If the company is not worth anything and shows a loss, surely it goes on the value of the share i.e. 1 euro each and he has 50% share holding?
 
The 14,000 could be considered as Benefit in Kind, has he been declaring it as such ? I would agree that you need to take legal advice....
 
Carols said:
If the company is not worth anything and shows a loss, surely it goes on the value of the share i.e. 1 euro each and he has 50% share holding?
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So you would be happy to sell your shareholding to him for €1 per share?
 
YOu do need to talk to the company's accountant / auditor and solicitor on this ASAP. There are methods of valuing companies. At its simplest, the shareholders funds in the accounts reflects the value of the shares. If net assets are €1,000 and there are 2 x €1 shares then each share may be taken as worth €500. Given the liabilities as you described bank and director loans then see what the Balance Sheet says. However if a company has potential earnings etc. there are other methods of valuation. AS others have said, get professional advice.

On an aside, if your other director has been getting expenses and no salary, there may be a tax issue to discuss with the company accountant/auditor. I believe ( correct me here ) that to be entitled to expenses a director must have a salary or it's not tax deductible for the company. Look at the logic, who would be working for expenses only and no salary. ( a Revenue auditor disallowed expenses for a director of a client company who had expenses and no salary )
 

Hi Graham,

I'm not sure of the actual position in relation to this point, but I suspect your understanding may not be 100% correct. I would have thought that there are situations where it is reasonable and legitimate for someone to be receiving expenses even if they are receiving no salary. For example in the sports & voluntary sector, it is commonplace for volunteers to receive expenses in the absence of any salaries being paid - GAA players and managers come to mind. Also where a company is insufficiently profitable to justify paying a salary to a director/owner, I believe it should be still acceptable for the director/owner to claim vouched expenses in compliance with normal Revenue guidelines.

I am intrigued by your mention of a Revenue auditor disallowing expenses where a director had expenses and no salary. I wonder were they technically correct in doing so?
 
You need to sit down with an accountant and plan an exit strategy that suits you. If you feel the company does not have a future then you need to organise the exit now. With loans and that it will take time. The end result is that you want the company to pay you back your capital invested, repay the bank loan and also to compensate you for the work you have done. If your ultimate goal is to close the business then you want the net assets of the comapny to be nil on the day you do it, your fellow shareholder would then be welcome to his half of that.

If you feel that the business has a future then you need move away from the other shareholder. If this means closing one company and starting a new one then it is somethign that also needs to be planned so as not to open yourself up to a claim form the other shareholder for a genuine loss of income as opposed to his current claim which seem a little cheeky.

The crux is getting the right professional advice adn putting into place a longer term strategy to maximise your return form the business.
 

Would mainly have been referring to "for profit" companies with directors on salary / expenses. Understand position on voluntary especially those with charitable or sporting exemptions as there isn't a C.T. issue anyway.

She was quite forceful in her belief that expenses would only be CT allowable if the director was on the payroll. However I've failed to find any specific exclusion and wonder if its something buried deep in an inspector manual somewhere but not specifically excluded in legislation. Perhaps more digging required !
 
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what about setting up a new company taking the business with you and leaving the current company and letting the company become dormant?
 
Thanks for all the advice guys. I didnt know I could set up a new company without his consent. I know its me that is growing the business but would he not be able to take a case agaisnt me if I did this, i.e. pull business away from the current company into a new company. Also if leases are offered to be renewed and his name is on current lease with me - does he not have to be offered the next set of 4 years and 9 months as well or is that totally up to me at that point? Sorry about all these questions, you must all think I have no business sense, but I am more hands on day to day, than used to dealing wth all the legal stuff.
 
Carols said:
Sorry about all these questions, you must all think I have no business sense, but I am more hands on day to day, than used to dealing wth all the legal stuff.
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So leave the legal stuff to the experts. Get a solicitor.
 
as a director of the company you have an obligation to the company to act int he best interests of the company. These is a degree of case law governing the extent that you can set up and go into competition with a company to which you have such a duty of care.

You could be prosecuted for breach of company law. Either a solcitor or good accountant should be able to let you know the extent to which you can compete with the existing company.
 
Get legal advice

however very important to remember he has serious obligations as director

1. To file accounts
2. to repay loans

being a director of a company like above may mean

1. He is banned from being a director in the future
2. His credit rating is damaged - loans not repaid

Sounds like business assets are low. Seriously consider setting up new company and /or opening legal correspondance with him regarding his directors obligations. In reality the existing company will likely not come after you as there is no one there with an interest in doing so. Typically only the revenue would do it if they were owed alot of back taxes.

if you pull the plug on it right now he is facing joint responsibility and the banks will come looking to him for the loans too ......in full if you do not pay them. A few legal letters including explaining the banks want to meet him about the losses and repaying the loans and he may be jumping at the bit to get out of it.

Also look on the bright side - you saw his true nature before you created real value in the company for him to take 50% of it.
keep the equity next time !
 
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