I am a managing director and a 50percent shareholder in a Pty Ltd company. My partner does not work in the business and also owns a 50 percent share. We both have loan accounts from money we put in to start the business. We do not have a loan agreement or resolution of any sort. My partners loan account is R 200 000 and mine is R100 000. When we started I verbally agreed for him to set the interest rate on our loan accounts at 5.5 % and for him to draw an amount of R 5000 per month, which included the interest. This payment has been made every month. As I draw a salary and run the business I did not ask for a monthly repayment on my loan account which was around R 50000 when we started and has grown through other amounts I have put into the business as well as interest.
After two years and our personal relationship ended,he has suddenly decided to increase the interest rate from 5.5 to 8.5 percent on his loan account. I have objected, but he tells me that I have no voice, and he is entitled to make adjustment as he sees fit, as he put up most of the capital in the beginning. He then went ahead and made the revised payment to himself from the business account. I told him that this was an unauthorized payment, but again I am told that I do not have a voice.
I know that I could also start claiming my loan account payments at the same rate, but I don't feel that that is in the best interest of the company at this stage. We are only two years old and I don't want to drain our resources which will blunt our ability to grow.
He has also stated that the business will not fund lawyers fees if I choose to go that route, as well as threatened to change the terms further if I rock the boat.
Has anyone got some good advice for me?
Is he a director?
In a nutshell he is wrong on all counts.
Remember that the company is a person too, with rights. If it's funds are abused it may take action against one or all directors, represented by the a shareholder and yes, it would then have to pay the legal fees. Or of course you can do it your personal capacity.
That would of course spell the end of the relationship, so perhaps you would be better off if you charged 8.5%, which is not unreasonable, as well. Nothing says you must actually make the repayment if you need to preserve funds, but you can and should accrue the interest.
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Yes he is a director. Thanks for your response. Is there anything I can do to stop him from making the payments from the account in this regard?
Well yes. Decisions of that nature require a simple majority, which he does not have. But nor do you, so the status quo remains, meaning your original agreement @ 5%. The problem is, in absence of agreement, you need to resort to legal channels, because I presume he has a mandate on the bank account.
If you recall, when you opened the bank account, you had to provide the bank with a signed resolution, mandating whoever to transact on the account. Perhaps you originally stipulated two signatories?
If he does not have a sole mandate, well then that's another matter entirely.
You need to consider at least two separate issues; that he has varied an agreement unilaterally, and whether he has the requisite authority to make the payments.
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He does not have sole mandate and we did stipulate two signatories. So if I understand your advice correctly, he does not have the authority to make that payment to himself without my approval. I guessed that, but was not sure what I could do about it. I have a very good relationship with the bank manager, so I guess that should be my next step.
You have been amazingly helpful and I really appreciate you sharing your knowledge with me.