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Thread: Please Help! Delinquent Director

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    Please Help! Delinquent Director

    In 2015 I purchased a residential property with 2 other people, using a PTY. All 3 of us are directors and shareholders, I have 49% shares and the other 2 have 37% and 14% respectively. Shares were allocated based on the investment of each director/shareholder.
    As per an agreement, each director agreed to pay a percentage of the mortgage, property running costs, maintenance etc. Note that the "company" does not generate it's own funds but relies on the directors to pay expenses. The company is not registered for VAT.
    The director with 37% shareholding has not kept up with their agreed payments and is refusing to pay (in excess of 24 months). In order to prevent losing the property, I have been paying the contributions for this director, putting myself under financial strain.
    Our accountants set up loan accounts for the directors, including the initial investments and payments made by each. Currently they are deducting the non-payments of the 37% Director from their loan account.
    Question: What happens when this loan account reaches a zero or negative balance. Is there any way to "get rid" of this director?
    I have proposed numerous "buy out" offers, which in turn have all been declined!
    Surely there must be some form of repercussions for the non-paying director??

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    The director can be removed in terms of Section 71 of the Act. You require an ordinary resolution which normally means a simple majority of voting rights. So provided you and the other shareholder are of similar or same opinion, you would be able to pass such a resolution.

    Read Section 71, because there are requirements and CIPC will not entertain a removal unless they are complied with.

    However that does nothing about this fellow's shareholding, nor about his debt to the company. I am afraid you will have to take legal action.

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    ˄ This.

    Two points to add:

    1. If it wasn't obvious, Andromeda is referencing the Companies Act.

    2. If you can't pass an ordinary resolution because the other shareholder does not support it, Section 71 does entitle you to approach the courts to have the delinquent removed (obviously not ideal, but at least you have a contingency plan).

    Founder of Growth Surge - Helping entrepreneurs create more wealth and enjoy more freedom.

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    Thanks for the replies.
    The other director agrees with me and we intend to remove the "delinquent director" by means of ordinary resolution. However this director has threatened that should we proceed to remove them as a director, they will put in an application to liquidate. The non-paying director is demanding ALL of their initial investment to be paid back irrespective of whether they have paid their contributions or not. Being the one that has been so called "fitting the bill" and paying the shortfall from the other director's non payment, I am only willing to offer their initial investment less ALL the amounts I have paid.
    To add further, the property value has decreased somewhat due to partial breakdown of a building by the non-paying director, so essentially the "share value" is no longer the same.
    I suppose I have to face the fact that we are going to end up in court one way or another in order to remove this person completely!

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    Quote Originally Posted by BJH View Post
    Thanks for the replies.
    The other director agrees with me and we intend to remove the "delinquent director" by means of ordinary resolution. However this director has threatened that should we proceed to remove them as a director, they will put in an application to liquidate.
    Only a creditor can apply to have a company liquidated (excluding voluntary liquidation).
    The non-paying director is demanding ALL of their initial investment to be paid back irrespective of whether they have paid their contributions or not.
    If you are referring to his initial share capital; that is a buy back by the company and normally requires a special resolution. It's actually not something a shareholder can demand. Actually there seems to be considerable confusion in this and you should appreciate:
    - firstly the difference between shareholders and directors (that you are both is actually coincidental)
    - secondly, the consequences of no minutes or record of resolutions of directors or shareholders
    - even the capacity of you fellows with regards to your subsequent funding of the company's activities; did you do so as shareholders or as directors?

    You should probably consult an attorney because there are too many unknowns for a quick discussion. For example, unless the board of directors, at the inauguration meeting, actually decided on a value of the issued shares and recorded it, then the share issue is a nullity and the company has no shareholders, only lenders and directors. This has consequences.

    I have attached the CIPC guideline for Sec 71 Removal_of_directors_july.pdf

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    Thanks Andromedia, I have now consulted an attorney. A frustratingly long and costly process lies ahead..... 😢

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