Tough at the Top – when business owners fall out of love with each other. Heather Stanford - associate and solicitor at Nelsons.

Dispute lawyers have been in demand during the economic downturn, making them more visible than they were during the boom years of corporate transactions and property deals, when non contentious lawyers were definitely flavour of the month. In good times, everyone broadly gets along, or is being well paid and ‘puts up’, but when economic times get tough, inevitably people fall out. Whether domestically or in business – strapped for cash usually means the cracks in any relationship start to show – and that’s why many dispute lawyers have seen a sharp increase in work since 2009.

Whilst that might smack of benefitting from the economic misery, some interesting trends are now starting to emerge from the upturn in commercial fortunes, particularly in businesses starting to finally see improvement in profits and turnover, after months and years of really tough trading. Whilst times have been hard, many directors and business owners have put the proverbial ‘nose to the grind stone’ and held in there – working long hours, with reduced turnover, sometimes for little or no profit, to get them through to some light at the end of the recession tunnel. Whilst disputes may have arisen, the money to litigate was scarce or non-existent during this time and the common goal of survival held the ship together. Now that the recovery light appears to be dawning, owners are starting to look up and around at their business, and in particular towards their fellow directors and co-owners, and take stock.

In our experience, this has led to an increase in internal business disputes as the pressure of keeping the business afloat lifts. Disagreements between owners or directors, and between directors and shareholders of companies, are arising as they start to review and assess the contributions being made by their peers. Some are starting to wonder if all are really pulling their weight. Is that owner worth their profit split, and in that situation, what can be done to pull someone into line, or remove their nose from the profit trough entirely? Can you ensure that uneven contribution is reflected in rewards? And what can you do if the bottom has well and truly dropped out of your relationship with your co-owners, directors or shareholders?

What can be done will depend on the business vehicle – different solutions apply to partnerships and companies – but broadly the options are either contractual or statutory. Contractually you might have the benefit of a robust director’s contract of employment including service level agreements. You might have a shareholders’ agreement which dictates what happens in a dispute scenario. Alternatively, in partnership you should have a written partnership agreement (of course!) tailor made to your needs rather than borrowed from someone you know.

In my experience, the SME businesses that have all those things in place, and are fit for purpose, are few and far between. More likely you are falling back onto statutory provisions for assistance, and they can be a very blunt instrument indeed. Dissolution under the Partnership Act 1890 is cumbersome. Rights of directors and shareholders can be protected by threatening actions for equitable winding up or unfair prejudice under the Companies Act 2006, but these are expensive and often unsatisfactory. However, the threat or commencement of proceedings often results in pragmatic negotiations. In this way they can be used for leverage and are rarely taken to their natural conclusion to bring the business to an end. Settlement is also encouraged and sometimes pushed very hard by the judges, and this can assist in concentrating minds.

Human nature is such that in the initial enthusiasm of setting up a new business, people feel that they will never fall out, which means that they will often have inadequate documentation. As a consequence, litigators will always be busy. Given that rather clunky tool kit provided by statute, the sooner a business gets its internal house in order contractually, the better. With proper documentation in place, it makes for greater certainty and when things go wrong, provides more ammunition to chivvy the non-compliant into line.

Mediation and other forms of ADR can be useful too. It has taken some time to establish mediation in the litigation landscape, but it has certainly gained more than a foothold and is likely to feature more and more, offering as it does, a practical and relatively cheap means to reach agreement.

The important point is to get advice fast, get your documents and contracts in place whilst internal relations are good if you can, and if all else fails, keep good records and make sure you know a good commercial disputes lawyer who can assist – But be warned: we are really busy!