[Question] Problem with members of CC

[anakin]

Hey guys,

There is a serious problem with the company now. I'm asking for any suggestions since I'm not so sure about the legal issues.

The company (Closed Corporations) was established January 2008 by 4 partners (including myself) and we all have signed how much we will earn on per monthly basis. I took the most salary (R20K). One partner lend R 170K to the company (transferred R120K in total, directly to company's banking account) and R50K paid to companies for resources (computers, software, etc) purchased.

Early in 2008, there was a problem with one big project and I was forced to take the pay cut, but not the rest of the members, but agreed that money will be paid back later. Then 7 months later, we suddenly got very busy and my salary is back to R20K per month. We had a very healthy bank balance. It was decided to lower the debt by R50K which we did, R120K still outstanding. The company owes me 24K. Now, we are back into difficult financial situation. Our bank balance is almost equal to the total liabilities. One member wants to get his money back, let me go or to fire me with majority vote. The company owes me 24K in debt. The problem is that they are not being fair enough. The company will be forced, as agreed, to pay my money back - while the money is still available - R24K in total but they still want to continue doing business under the same Name without me.

1. Is it possible for other members to fire me with majority vote because of financial strain - they know I did nothing wrong?
2. If all liabilties are paid, I still own 25% in assets but they refused to give it up or to compensate because they want to continue with the business. They just can't ask me to go while they keep my portion of assets? Am I right? Should they compensate or to buy my portion in asset should they want to continue with business.
3. Is it better to close down the company and distribute the assets while it is still possible and they can restart the business without me? But they refused to do so.

Hope one of you will be able to respond to my questions or to suggest. I'm not asking for advice and I want some fair options.

Thanks in advance!

[Dave A]

It sounds like you're involved in some heavy negotiation there, Anakin.

They need to buy your interest in the CC. They can't just "claim" it by majority vote. If there is no clause in any agreements between you that sets out a formula for determining the buy-out value of a member's interest, the price needs to be negotiated between you as an individual seller and the other members as the purchaser.

Given the apparent value involved, there might not be enough in it to just toss the whole thing to a lawyer to represent you going forward. But it might be worth consulting a lawyer to look over your agreements of association if they are complicated and give you some advice.

I'm sure many of the members here will tell you that if you're leaving, it's in your interests to make sure it's a clean break.

BTW. There might be a retrenchment angle on your salary too if they really play hard ball.

[anakin]

Thanks Dave! I completely agree!

The company assets and resources will be the only surplus should the company close down now and all liabilities are paid.

Seeing that the other members want to continue with the business under the same name without me, my offer was:

1. Company pays all balance outstanding to me (part of the company's liabilities)

2. 25% share in assets and resources, but I generously asked for a machine worth less than 10% in total assets and resources combined and they can keep the rest or equivalent in cash.

They said the assets and resources belong to one member and the 25% doesn't belong to me because the debt is not fully settled yet. They have right to keep everything because they want to continue, but they didn't realise that the assets and resources will be surplus should the company close its door now.

[duncan drennan]

Anakin, have you signed any sureties for the CC?

[anakin]

We did sign the formation and how much each member will be earning, but without exit strategy or sureties with regret. I guess the standard business law will apply, am I right?

[Dave A]

No sureties is good news in your situation.

They said the assets and resources belong to one member and the 25% doesn't belong to me because the debt is not fully settled yet.

That is possible if the assets are security for the loan. They are what is known as encumbered assets and the financier would be a preferential creditor on income from the sale of those assets in the event of liquidation.

What you might need to bear in mind is that the fair market value of your interest is not necessarily directly related to the net asset value of the business. Normally it is related to profitability or expectation of future earnings.

[anakin]

... but the value of the current assets is slightly more than the current debt. The members have opted to continue with the business as they believe that they will generate profits in the future under the same NAME but without me on board. About 30% of current debt are paid. They considered closing the company doors but changed their minds.

Another problem is that if I accept with just R 24000 in debt (to be paid to me), then they can close the doors immediately and settle all debts and distribute the asset between the remainder, which is not fair!

[anakin]

One partner, who lend the most money to the company, effectively doesn't own the 30% debt-free assets, am I right?

[duncan drennan]

We did sign the formation and how much each member will be earning, but without exit strategy or sureties with regret.

I was actually wondering about any personal sureties that you might have signed to obtain credit or financing for the CC. e.g. CC applied for an account and they expected all the members to sign a personal surety. This doesn't directly impact your exiting the CC, I'm just wondering about the implications of the direction the business is going.

[anakin]

Sorry I meant this:
... but the current liquidity (cash) is slightly more than the current debt. The assets and resources are surplus. The members have opted to continue with the business as they believe that they will generate profits in the future under the same NAME but without me on board. About 30% of current debt are paid. They considered closing the company doors but changed their minds.

Another problem is that if I accept with just R 24000 in debt (to be paid to me), then they can close the doors immediately and settle all debts and distribute the asset between the remainder, which is not fair!

[anakin]

Yes, Duncan, you are right since we have succesfully opened business account at Nedbank, but the account is not overdraft account - debit account. The company didn't borrow any money from the Bank. Just from the members when the company was established. The current debts outstanding are R120K to one member and R24K to me.

[Dave A]

... but the value of the current assets is slightly more than the current debt.

One partner, who lend the most money to the company, effectively doesn't own the 30% debt-free assets, am I right?

If the loan is to the company and the assets were bought by the company but are security against the loan, then he doesn't own any of the assets. But the company can't dispose of or otherwise encumber the assets either without settling the loan or getting his approval.

Anakin, I'm not suggesting you should accept just the R24k for your salary loan. What I'm trying to say is the negotiation on the value of your member interest is possibly being fought on the wrong grounds. You're in a negotiation and part of the art is to confuse issues when it suits.

Let's try to reduce the confusion.
The R24k owed to you for a past salary sacrifice is not in dispute, right?
If so, the point of disagreement is on the value of your member interest.

Have I got that right so far?

[anakin]

I have edited the message with red text further down the thead just in case you missed that part.

Yes, you are right - the 24K payment is not in dispute. The real problem is that they want me to get me out just with 24K as "payment" while they keep the rest and continue with business.

What if they want to close down as soon as I get out then they can just settle all debt with cash available in our bank balance and get away with sharing all of company assets and resources between them.

If that's not their intention then, as you have suggested, they will need to pay for my "interest" in company. That will be completely square and fair.

[Dave A]

So far so good.

Now just how much in Rands are you looking for your member interest?
(You can PM me the number if you want to keep it private).

[anakin]

I'm not sure how much, realistically, I want 25% of total value of assets and resources as well as "interest" taking the possible/estimated future profits into account. The current profit is almost zero but there are assets and resources should they want to continue with business. There are some possible jobs in the pipeline, but none of them were confirmed yet.

The last year's netto profit was healthy, not bad after the first year since a lot of marketing and running expenses were paid during the first year.

So I'm looking at 25% of the total assets/resources (minus depreciation)plus "interest" in company along with R24,000 the company owes me. It is really difficult to calculate the "interest" after first year of business, but I have made it clear that I'm open to any reasonable negotiations. They still refuse it.

New development: A weird one - one member is willing to give up his share for free now and expect to transfer/distribute his share and debt between the rest of us. I have not responded since I'm not sure if that's possible.