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Director unfairly excluded from company he set up

Posted: 16th October 2013   In: Dispute Resolution

When setting up a new company, it’s important for directors to ensure that all the legal requirements are fully met and that everyone involved understands their rights and responsibilities.

Failure to do so can soon lead to confusion and legal action, as illustrated in a recent case before the High Court.

 It involved two men who started a business importing weight loss machines in April 2010. Both men were directors and one of them began running the business on a small salary. He said he did this on the basis that he was an equal shareholder.

However, he was later dismissed and removed as a director in November 2011.

He began a petition for unfair prejudice on the grounds that he had been excluded from the company from the time of his dismissal even though he had set up the business with his partner on the basis that they were equal shareholders.

The partner denied that the employee director had been a shareholder, despite there being an annual return splitting his shareholding between new investors.

The court held that the two men had set up the company on the basis that they would be equal shareholders. That’s why one of them had agreed to work for a low salary. The employee director had been paid dividends, which could only have been explained by him being a shareholder.

The fact that he had never been entered into the shareholder register was explicable on the basis that none existed. The fact that a declaration of dividends had never been made as required under the company’s articles was simply because the legal requirement to keep proper documentation had been completely neglected.

From the outset, there had been an almost complete disregard for the legal requirements for the operation of a limited company.

The court ruled that the employee director had been subjected to unfair prejudice and was entitled to seek damages.

Please contact Neil O’Callaghan if you would like more information about the issues raised in this article or any aspect of company law.