Many recruitment businesses are facing challenging times, despite signs the UK economy has been growing and is predicted to continue to grow. However, in late October accountants EY predicted UK growth would be lower at 0.9%, down from the 1.1% it predicted earlier this year. Many in the sector will be hoping that clients remain confident so that recruitment levels don’t drop any further.

Cashflow is key to keeping any business running, but there will also be nerves around tax changes and employer costs that were announced in the budget on 30 October and how they could put further strain on recruitment firms who are paying contractors and staff before being paid themselves.

Having good credit control procedures in place allows a business to effectively collect debts and deal with nonpayment issues more efficiently. But some businesses are still struggling with cashflow, especially those carrying the burden of debt. Whoever the creditor, directors may now have a difficult decision to make.

Faced with these challenges, it isn’t unusual for situations to arise where directors and/or shareholders of the business can’t agree on the way forward. Some will want to try to weather the storm, while others want to find a new route out of debt which could include the business being sold to release them from liabilities. 

When you reach any sort of impasse it is important for directors to remind themselves of their director’s duties and obligations to the shareholders and creditors. Many businesses have loans that carry with them director personal guarantees, so they may be reluctant to personally pay if these loans default.

Where directors and shareholders are not the same people, then they must take into consideration a number of factors in line with their duties. Directors must consider the shareholders’ views and votes as expressed at an AGM and whether the necessary resolutions have been passed for decisions to be made, if applicable.

Directors can call their own meetings and seek to pass the necessary resolutions, but this will depend on the subject matter, if it is for the shareholder or director to vote, and the number of directors vs shareholders. This would be detailed in the business’ Articles of Association and the Companies Act 2006. Minority shareholders may have the right to bring an unfair prejudice petition if the directors are acting in a manner that is unfair to them – for example, running the business in a way that reduces shareholder dividends.

Directors must consider their duties both at common law and under the Companies Act 2006. As an example, they cannot be undertaking fraudulent or wrongful trading and that will include continuing to run a business if it has insufficient assets to meet its liabilities. Where there are personal guarantees, it is likely the director(s) giving the guarantee will want to pass a resolution for the debts to be repaid or have a structured repayment plan to reduce the firm’s liability and thus theirs. How that is passed will depend on the company’s articles of association. 

It is advisable for directors to notify shareholders of their decisions and to keep concise records of board meetings and resolutions. This will help mitigate the risk of contentious proceedings being brought by shareholders, or at least justify why decisions were made by the directors at the time. Where there is a need for business restructuring it is important to take advice early to avoid contentious situations developing which may be time consuming and costly to resolve.

Katarina Morgan is an associate solicitor in the commercial litigation department at Taylor Walton Solicitors www.taylorwalton.co.uk

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