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Thread: Dispute between members of a CC

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    Dispute between members of a CC

    Hi there.

    I hope someone can give me some advice on a thorny issue. My husband, together with his parents started a CC in 1993. The CC is exclusively in farming. The CC was started with only a few pieces of machinery and a few tractors. Both his parents were at that time already aged, and wasn't active in the business. The shareholding was divided 60%/20%/20% with my father in law owning the majority shares. There wasn't any association agreement drawn up between them, and it wasn't a problem until now. In 2009 my father in law passed away and his shares were divided between my mother in law, my husband, and his 4 sisters respectively. My husband bought out 3 of his sisters' shares, and when his mother passed away in 2011 he inherited her shares, which makes the shareholding as follows: 90% for my husband, and 10% for his one sister.

    My husband made his sister an offer on her shares which she declined on the grounds that his offer was too small. This was acceptable to him, as he was obliged (by his personal values) to pay each of his sisters the same for their shares. The problem is that she has no interest in running a business, but only wants money. She refuses to even set foot on the farm, and is asking for all our financial records with the mind to find anything incriminating so she can apply for the winding up of the company.

    Since the company started with virtually no money there was never any salary paid to my husband in 17 years. The CC paid his Medical aid, and other necessary expenses. This was also the case of my parents in law. There was a yearly "harvest share" allocated to each member, against which the expenses was played. I'm not sure how the amount was settled on by the accountant. Since 2010 my husband started withdrawing a salary of R 10k a month. This was raised to R15k a month from January 2012.

    So on to my problem: My sister in law has gone to a lawyer who wrote us a letter stating the following:

    1. We are using CC funds for private expenses (medical aid, insurance, fuel, etc)
    2. We sold assets without her permission (this was done before the estate was settled, and the executors was informed)
    3. We have not provided audited financial statements (we don't need to be audited and we did supply financial statements)
    4. Dividends were not paid to "some members as required" (no dividend was ever agreed upon, and no member required it)
    5. Various other ridiculous accusations

    On above mentioned grounds she wants the winding up of the company because that is the only way she will get the amount she want for her shares.

    My questions is this:

    1. What is a fair salary for a farm manager that does all the decision making and marketing, and generally generates all the income? The CC has grown from nothing to an approximate nett value of R 18 million.

    2. Can my husband lease his personal implements and machinery to the CC? Can this amount be played off against his loan account instead of being paid out in cash?

    3. Can my husband sell CC assets (tractors or machinery) to himself against his loan account? Does he need his sisters' approval for this?

    4. Can my husband buy or sell any CC assets without his sister's approval seeing as he has 90% of the shares?

    I really hope you can help me with this, as I am trying to rectify the books to accommodate her. In the past my husband and his parents had a trust relationship, and it wasn't necessary to explain every transaction made.

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    Diamond Member Justloadit's Avatar
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    I suggest you get a company lawyer involved here, an try not to sort this out on your ow. The sister is already one up on you, as she has already got a lawyer involved.

    As your husband has 90% shares of the company, the sister has very little say in the business, and quite frankly, using some creative book keeping, the company will never make a profit, and she will never see a cent.

    She has already placed herself in a situation, in which she has made allegations, in which she can not prove. Secondly, she has no authority to close any business down as a very minor share holder. You should look at the CC certificate of incorporation, which should deal with a corum for any business decision.

    The best is to get the lawyer involved, so that you can show that you mean business.

    She can also not demand any amount for her shares, and this is usually dealt with in a certificate of incorporation.

    To be blunt, she has very little to stand on, but get legal advice to ensure that you do everything procedurally correct.

    Just be sure of one thing, there is going o be hatred between your husband and the sister, irrespective of how the situation unfolds. She will always feel done in, no matter how much money you give her. When the company is successful in future, she will feel done in as she is not participating.

    This is the single most important reason that paper work should always be a priority in any business venture, no matter how good friends/family you are, money always has a way of creating expectations from all parties.
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    Dave A (28-Dec-12), rfnel (27-Dec-12), zimbique (27-Dec-12)

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    Site Caretaker Dave A's Avatar
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    With this sort of money in play, when one side pulls in a lawyer, the other pretty much has to as well.

    Toss it to a lawyer and don't stress about it. Reading between the lines, you probably hold all the cards.
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member AndyD's Avatar
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    I would tend to agree with everything already offered. Unfortunately the moment your sister-in-law instructed a lawyer it ceased to be a family matter and it immediately became a legal one. Treat it as such and get legal advice, as DaveA says, your hands are pretty much tied.
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    Thank you all. We have already been speaking to two lawyers. I'm not really worried about her legal activities, I would just like to cover the accounting side, and keep our side clean. Fortunately, coming from an accounting background, I have been able to do that to date. The problem is, that me and my husband don't want to put our cash flow under pressure, but we have to generate an income for him to cover his private expenses - and THAT is where we have to get creative now.

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    Diamond Member Justloadit's Avatar
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    There is no reason that you can not pay a manager R30 to R40K a month, it is not yup to the minor share holder to decide.
    In any business, the success of the manager dictates his income, and whilst there may be bargaining between owner and manager in determining the salary, in the end is whether the manager is performing to ensure that there is sufficient/acceptable profits after expenses for the share holders.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
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    I do not see why the medical aid etc cannot be paid by the company these are considered as business expenses as it represents employment costs. In view of the fact that the company has grown in net asset value I would say that such a salary is reasonable.

    As additional info - I would refer to the memorandum of Incorporation and refer to the section Shares and Share Capital this should also give you some more clarity.

    Refer to resolutions that were made etc debit loan accounts of her.

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    To bring you up to date on this. During April we received a letter from my sister in law's lawyer stating that according to them the CC is in financial distress and has to apply for business rescue. This is ridiculous, and we immediately supplied them with all the information they needed to proof that this is not the case. They replied with a letter stating that we were lying, and that they were applying to the high court for the CC to be placed under business rescue.

    Needless to say, we employed the big guns, and hired two of the best advocates we could find. We worked our butts off to make a water tight case. About a week before the court date we discovered that the commissioner of oaths that attested my sister in law's affidavit was her lawyers wife, and they are working together in the same practice. We filed a affidavit to the court in this regard, and now there was a fox loose in the hen house! All documents they were supposed to file to the the court were late, and some never even got filed. The judge postponed the hearing until the next day (already miffed!) and the next day they arrived with yet a new advocate (without giving notice) and tried to present new documents regarding the illegal affidavit without it being filed to the court. The judge was furious, and dismissed the case with costs (client to attorney).

    In short - the business rescue matter was never even argued. They are not allowed to bring a similar case again, and now they are in debt with legal fees, which according to my calculations, won't be less than R 300 000.00. Should she not be able to pay these fees, her shares in the CC will be auctioned off.

    I would like to inform you that through all my research I have come to believe that the whole business rescue concept can be abused to liquidate solvent companies. Some of the practitioners work for a percentage of the nett assets, and they are entitled to get paid before the creditors. It is actually possible to liquidate a solvent company on the basis of problematic cash flow alone. So beware! Don't thing because you assets exceed your liabilities that you are necessarily safe.

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    Site Caretaker Dave A's Avatar
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    Thanks for the update, Zimbique. You must be feeling fairly satisfied with the outcome so far.

    Quote Originally Posted by zimbique View Post
    It is actually possible to liquidate a solvent company on the basis of problematic cash flow alone.
    A worthy warning indeed. "Problematic cash flow" is the normal reason for one's hand being forced in these things. Creditors have a perfectly reasonable expectation to be paid on time, and it's up to the directors (or members of a CC) to ensure this happens.


    Quote Originally Posted by zimbique View Post
    I would like to inform you that through all my research I have come to believe that the whole business rescue concept can be abused to liquidate solvent companies.
    It's actually going to be interesting to see how the business rescue provisions work out in the long run full stop. It certainly didn't help with the Velvet Sky collapse.
    The trouble with opportunity is it normally comes dressed up as work.

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