Starting up a new company whilst still a director of another company - The Book-keepers Forum (UK)

Elaine R · Senior Member

Starting up a new company whilst still a director of another company

Shamus · Forum Moderator & Expert

You can have multiple directorships but that is not really the issue here. You seem to be confusing directorship and ownership.

Your freind can stand down as a director but if your client owns shares in the busiess then to give up ownership he must relinquish those shares. This is usually done by selling or gifting the shares to the remaining owner(s).

There may be something in the articles to either enforce or prevent this but it's doubtful that the directors will have anything other than standard articles.

The other issue here is that your freind could be sued by the remaining director if he sets up in competition.... Damn, what's the case law for that one... Its on the tip of my tongue... Its a car company and nothing to do with the parking one.... Nope, sorry, got to go get me law books...

Found it...

Gilford Motors Co. Ltd. v Horne (1933). The findings were that that the company was a cloak to shield the fact that the defendant was carrying out a trade that his former employment restricted him from competing in.

Basically, I would advise your client to seek legal advice as if they take just one client then the existing business has grounds to sue for damages. That there is a new limited company involved means nothing per the Gilford motors case where the court detmined to lift the veil.

All in all, being a director of a second company is the least of the issue. Setting up in competition and getting recompense for his share of the existing business are the real problems at hand.

Time for solicitors rather than bookkeepers methinks (personally I know just about enough to know that something is not right but once I get that incling then my advice to clients is always to seek professional legal advice).

kindest regards,

Shaun.

ilsm · Senior Member

All very good points, Shaun, and very wise to suggest professional advice: an absolute must now, even if both parties reconcile their differences and agree to carry on. Trust is shot and they will need to know where they stand going forward.

Elaine, by all means talk the problem through with your friend, but on no account give advice. I doubt you PII covers this kind of advice. And make sure your friend understands this.

I assume the directors have equal shareholdings. If not, the majority shareholder can outvote the other and remove his directorship, and, eventually, persuade/force him to leave. But even that has to be done the right way! As the director who leaves will still be holding shares in the first company (he doesn't have to give them up), he will be able to influence that company's proceedings until he is bought out, and this should enable him to secure the remaining director's agreement not to raise too many obstacles.

As I noted in another post, people (including ex-directors) can and do set up a rival companies at any time, and if the first company then tries to sue, they can resist the action by claiming that preventing them from setting up would be a restraint of trade. Of course, if the departing director forgets to resign and isn't fired, he will still have duties and responsibilities to the first company, and starting the new company would create a conflict of interests which he might have to compensate the first company for.