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Thread: Advice on business failure due to 3rd partner

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    Angry Advice on business failure due to 3rd partner

    Hi there,

    We have a really long drawn out scenario on the go regarding our young business, how it was run and how it began to go pear shaped. We are at the point now where we are trying to extricate ourselves from this scenario so that we can move on, resume receiving an income and get out of debt. In order to avoid a long winded post, I'm going for the nutshell approach

    We had a new business idea and approached "Bob" for an investment into it.

    PTY registered July last year, Bob has 52% of shares "to safeguard his capital investment", myself and partner 24% each. Bob also wanted to manage the finances of the business, again to protect his investment. We were okay with this feeling that he brought financial planning and experience that we didn't have and thus this would be his role in the biz. Us remaining 2 partners are everything to the business, it would not run without the 2 of us. We are the only "employees" and do the full 100% of the work necessary in running the company.

    Things went very downhill from there in terms of mismanagement of loan accounts and his general lack of time for the biz resulting in supplier payments being missed etc.

    We all agreed to close the business at the end of its financial year (end Feb 2013) and go our separate ways, but are now back and forth trying to resolve money and time invested. Bob feels that, as his loan acc has the highest monetary value that he MUST be repaid. Which is impossible given the business's (online shop) only asset is the stock it has on hand which does not equal that amount. As we were not unable to dump a large sum into the company, our loan account has been made up with purchases along the way such as laptops and other office equipment necessary for the business to run, office cell phone contact, internet provider contract etc. We have drawn as meager a salary as possible to aid the company, much to the detriment of ourselves in terms of personal debt occurred.

    Bob has now "offered" that either (1) I take the store as it stands, including all its debt and repay him. (2) He takes the store as is, employs new staff and carries on with the store and all its debt (no mention of repayment of our loan accounts) or (3) we close the store, close the pty and a payment plan is instituted with all 3 of responsible for one third of the total debt.

    Now, we have 0 paperwork. No memo and articles, no shareholders agreements, no management agreements, nadda. All we have is our CIPC doc showing registration and share %s and verbal agreements that Bob has gone back on numerous times.

    I refuse to institute any payment plans as we have all plowed money and time into the biz which has failed for a variety of reasons. There is no pool of money for us all to be repaid from and toddle off into the sunset with. Is it not a given that money was invested into a legal entity which failed and therefore the only "person" legally required to pay anything back is the bust company? The company was given capital, it was unable to float itself or repay that capital and has gone bust. Therefore we have all lost money and effort in a venture which failed.

    Given the complete lack of agreements to refer to in terms of behaviour at this junction, what is suggested at this point? Is there anything to say that the other directors are liable to repay investment by one other director?

    I am happy to close the site as it is (will redirect to my other shops) and we all walk away having lost time and money. I just want to know that legally there is nothing he can come after us with.

    In terms of the site - part of his initial investment was spent on paying for a site to be built. We were left hanging by a bum web design company leading to me spending hours on google and youtube teaching myself web design and html etc to finalise the site and open for business. What we have now is nothing like the basic framework we were provided with that the company (via Bob loan account) paid for. This site is therefore my intellectual property?

    All thoughts and opinions greatly appreciated!

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    RobynME, you say "Now, we have 0 paperwork. No memo and articles, no shareholders agreements, no management agreements, nadda. All we have is our CIPC doc showing registration and share %s and verbal agreements that Bob has gone back on numerous times." The emboldened bit implies it is a cc, whereas the rest of the post says it is a company? I will assume it is a company.

    The company would not have been able to be registered without an MOI which replaces Memorandum and Articles. If it is a custom MOI it may well have elements of a shareholders agreement embodied in it. Shareholders agreements wrt companies registered in terms of the new act are unenforceable; their provisions must be embodied in the MOI.

    Some important questions:
    1. Are all three shareholders directors?
    2. Do all 3 partners have credit loan accounts (company owes them)?
    3. Are there significant 3rd party creditors?
    4. If 3 above is yes, have any of you signed surety?
    5. Do the assets exceed 3rd party liabilities?
    6. Is the company able to pay it's trade creditors?
    7. Who is the registered owner of the domain (you can use whois server at co.za to determine)

    Answers to these questions is required to give a proper answer, but I can give you some pointers for now, on the assumption that the company is factually insolvent:

    a) The company is trading recklessly as defined in the act, if it is factually insolvent or if it cannot pay it's debts, and unless the shareholders / directors subordinate their loan accounts to the extent required to redress the factual extent of the insolvency. There are unpleasant consequences for the directors in this case.
    b) Under these circumstances, any repayment of loan accounts are problematic, not least of all because it elevates the recipient to preferential status, which is a contravention of the Insolvency Act, amongst other things.
    c) The same will apply to arbitrary payments to 3rd party creditors; they are all equal and should be treated as such.
    d) If 3rd party liabilities are not an issue and it is only the loan accounts that are the problem, your stance and reasons for it are 100% correct. Consider that the loans were made to the company, not the other shareholders. The shareholders therefore owe each other nothing. If the company is truly bust, then you should voluntarily liquidate the company, and each loan account should receive a pro rata liquidation dividend. If there are funds leftover, only then can they be applied to repayment of share capital.

  3. Thank given for this post:

    AndyD (30-Jan-13), Dave A (29-Jan-13), flaker (29-Jan-13), RobynME (29-Jan-13)

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    Diamond Member Justloadit's Avatar
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    How much money are you talking about?
    This has a bearing on the what to follow.

    Anyway, if no MOI, then it falls down to share holding, and any amounts owing, in my view will be shared according to the company share holding. Now if sureties were signed, there is the clause "jointly and severally". This is still a mess, so what kind of money is involved?
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by CLIVE-TRIANGLE View Post
    If the company is truly bust, then you should voluntarily liquidate the company, and each loan account should receive a pro rata liquidation dividend. If there are funds leftover, only then can they be applied to repayment of share capital.
    That certainly was my kneejerk reaction - and at the very least the fall-back position if any of the partners becomes... unreasonable.
    The trouble with opportunity is it normally comes dressed up as work.

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    Thanks for your replies so far

    Just to clarify, we are registered as a (PTY)Ltd with 3 shareholders and (the same) 3 directors. We used the default MOI generated by the CIPC site to complete registration and planned to update and include all our agreements at a later stage.

    Clive :

    1. Are all three shareholders directors? Yes
    2. Do all 3 partners have credit loan accounts (company owes them)? Yes
    3. Are there significant 3rd party creditors? The company has run cleanly and has no debt aside from loan accounts.
    4. If 3 above is yes, have any of you signed surety? No
    5. Do the assets exceed 3rd party liabilities?
    6. Is the company able to pay it's trade creditors? We have run on a COD basis with all our suppliers
    7. Who is the registered owner of the domain (you can use whois server at co.za to determine) Info I'm getting is just details of our host server, will check that the domain was in fact registered in my name. Which it, by all accounts, should be as I put the site together long before CIPC regisration

    Justloadit :

    Myself and other partner are in for 50-60k each and have supplied all the skills and time needed for the company to actually run and turn a profit. We agreed on a meager salary to enable the 2 of us to keep our heads above water while supplying services to the company. (We have not been contractually employed though.). Bob determined the order he felt payments should be made often leaving us salary-less while funds were appropriated elsewhere.

    Bob's loan account sits at R250-R300k. We have been kept in the dark regarding his loan account and when it has increased, trying to get financial information in general out of him has been tricky to say the least.

    The only assets we have are the stock on hand and the only money we owe is to loan accounts.

    So legally all we can do is liquidate the stock and split it pro-rata? Whether each loan account receives R10 or R500 000 is irrelevant as the amount will be based on what the company has to sell to generate cash to settle it's debts? There is nothing can be brought against the other 2 shareholders/partners/directors as they have never signed liability?

    Bob has resisted all our attempts to amicably split the business. It has 3 income streams which could be split into 3 stand alone companies/sole props etc leaving us with one each (happily, due to the skills of each person and the nature of each income stream). He misses every point made and just keeps going on about his loan acc needing to be settled by the other partners.

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    To both Clive & Dave: what is the approx cost of a voluntary liquidation? Does a directors meeting be required to vote for same and if this be the case, then does the majority vote count?

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    Diamond Member Justloadit's Avatar
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    If all partners agree on a voluntary liquidation, and accept that there are no outstanding accounts, and that includes the loan accounts, it should cost around R20K, however if there is winding up to be done, and it seems that this going to happen, then the figure will be based on the amount of work a liquidator has to put in.

    Since the company does not owe any creditors money, it will be difficult to liquidate with out all parties concerned. As far as the loan account is concerned, every one can kiss it good bye, and if there was no agreement for the repayment, then there is no duty to pay. The fact that he took 52% of the shares for his stake in money, means just that. If the money is lost, then he losses his proportionate share.

    I am not sure on this one, but simply resign as a director as from immediate effect, do this by writing a letter that you resign as a director, and hand it to each partner and get them to sing for it, then stop doing any further work for the company, and let the other directors sort it out. You can accept that you are not going to get anything back. Once you stop doing work, it is going to die a natural death anyway, and may save you a lot of time and aggravation. If they do not want to sign the acceptance of your resignation, then send it as a registered letter to the company registered address, keeping all the records, so that when the sh!t hits the fan, you have your proof that you resigned, and that you no longer accept responsibility for any decisions made after the date of resignation.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Justloadit View Post
    Since the company does not owe any creditors money, it will be difficult to liquidate with out all parties concerned.
    The outstanding loan accounts means the company has creditors - any one of them could file for liquidation. Doesn't mean it'd get through without a fight, of course... Far better if all three directors/shareholders get on the same page.

    I've got to say I'm feeling more than a little unhappy about the lack of financial disclosure the minority shareholders/directors seem to be getting.

    We have been kept in the dark regarding his loan account and when it has increased, trying to get financial information in general out of him has been tricky to say the least.
    For any observers in a partnership of any sort out there reading this, make sure there are detailed financial management reports available for the directors every month. Without enough financial information available, how the heck do you know whether you're going in the right direction, let alone make any informed decisions?

    He misses every point made and just keeps going on about his loan acc needing to be settled by the other partners.
    That's pretty normal behaviour in any partnership breakup. No-one enjoys losing money

    "All I want is to get back what I put in" - that's still living in the denial stage if the business has been losing money. The answer normally is to show what happens if the company is liquidated - just how much everyone will get out (or even have to put in) - but for that you need a pretty accurate balance sheet available.
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member Blurock's Avatar
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    It is sad to hear about the demise of a business like this.

    Some pointers about start up businesses and partnerships;
    1. Be absolutely honest with each other. No Mr Nice guy or "oh but he's family" crap. Business is business. Family is what happens at home.
    2. If uncertain, ask questions. Do not give in until you understand completely and demand proof of everything. It is your right to know - the other guy's too.
    3. Decide up front what the business rules and office policy will be.
    4. Decide up front who does what and who puts in money and how much.
    5. Everyone is always optimistic when a new idea or business is hatched. Plan for failure and have an exit strategy. Everything may not be as rosy as you think.
    6. Never ever say "I am not good at figures, so I'll leave the bean counting for someone else". When you are in business, you'd better be good at analysing the figures. Get a copy of the bank statement. Check every entry. Ask questions. If the answer does not make sense, ask again. Get proof.

    There are many more, but these should get you thinking when starting a business with other shareholders.
    Excellence is not a skill; its an attitude...

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    That's exactly it Dave.

    Bob had it in his mind from the beginning that myself and the other partner were not able to make sound financial decisions. The cycle just perpetuated itself as we were never given all the information and could therefore not make any informed decisions. The complete lack of transparency has been our biggest downfall for this budding company. He has insisted on micro-managing everything - which has been impossible given he has zero daily interaction with the company. We have struggled, and failed, numerous times trying to organise a monthly meeting to bring him to speed and sort out decisions that need to be made.

    Given all the info I've received it seems our best option may be to resign as directors and head off that way? It's proved pointless thus far to try and come to an amicable split so I don't want to waste any more time back and forth with emails. Both the other partner and I are fine with accepting our losses, we just want to get out of a financially crippling situation and start making some money for ourselves! We're also both fine with him taking the left over stock (his first business could use it in their retail outlet) as a gesture given his larger loan account expenditure.

    The lease for our warehouse is also in his name, another controlling aspect. We have been saying since Sept last year that we need to move to a cheaper premises before it starts to drain our profits, us remaining 2 partners were unable to action this as the industrial estate will obviously only deal with the lease holder. After months of no salaries due to squandered cash, he eventually agreed to get cracking on exiting our lease in mid December. Too little too late honestly. I have since listed the property all over in the hopes we can find a replacement tenant by end Feb.

    So could we just resign as directors (& shareholders?) pack our stuff and leave with a "Thanks for nothing" mentality? If he manages to build a case against either of us and get it to court to try get us to settle his loan account personally, we'll deal with that then. That will obviously be a hugely costly exercise with no guaranteed result.

    Thanks for the tips Blurock - we've learned those while spending some serious school fees!

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