As a director, you must run the company in accordance with the company’s articles of association and company law. The articles will set out what responsibilities and powers the directors have, how decisions are taken and so on. Your duties under company law include promoting the success of the company while treating shareholders fairly.
If you are also a shareholder who has signed a shareholders agreement, then you are separately bound by that agreement.
Problems can arise if these two sets of obligations conflict. If so, company law and the company’s articles of association will normally take precedence. If you find yourself in this sort of situation, you should take legal advice.
If you are selling to business customers, you are entitled to claim interest and debt recovery costs for late payments. Normally late payment interest starts to apply after 30 days, or up to 60 days if agreed in your terms and conditions.
You can agree a reasonable rate of interest and level of costs between yourselves when you negotiate the contract. But if you haven’t done this, a standard rate of interest applies (eight percent above the Bank of England base rate). In these circumstances, you can also claim a fixed fee of £40—£100, depending on the amount of the debt, plus reasonable recovery costs.
These rules don’t apply if you are selling to consumers rather than business customers. Offering credit to consumers (other than accepting credit card payments) is regulated and requires a licence, so you should take legal advice if this something you do.
You can include a clause in your terms and conditions stating that the goods remain your property until paid for. Like other terms and conditions, this only applies if the customer agreed to your terms before the sale was made.
A retention of title clause like this might say that you are entitled to take your goods back if the customer hasn’t paid by the due date. Obviously this can be problematic if the customer has sold your goods on or processed them, or if the goods are perishable.
You should take advice on what to include in your terms and conditions, or if you want to try to enforce a retention of title clause.
Like a shareholders agreement for a company, drawing up a partnership agreement helps the partners think through key issues such as how the partnership will be run and what you are trying to achieve. By doing this you reduce the risk of disputes later on.
If you do not have a written partnership agreement, all the partners will normally be treated equally. This means that each partner will be entitled to an equal share of the partnership profits and an equal say in management. There can be a number of problem areas:
New partners can only be brought in if all the partners agree.
Any partner can decide to dissolve the partnership. The partnership also comes to an end if any partner dies or goes bankrupt.
It can be difficult to agree how much any partner who leaves the partnership is entitled to be paid.
You are not legally required to have a shareholders agreement, but it is a very good idea to have one. Having a shareholders agreement reduces the risk of disagreements later on and can make it easier to resolve any disputes that do occur.
Working through what to include in the agreement helps you to think through the key issues. This can be particularly important when shareholders have different objectives and circumstances. For example, if some of the shareholders work for the business while others are passive investors, how much will the active shareholders be paid? What will happen if you find you cannot agree on business strategy? And what is to happen to the shares owned by a shareholder who dies or leaves the company?
Before you agree to sell to any customer on credit, you should check their creditworthiness. Online credit ratings are inexpensive. You can also check trade references, ideally following up with a phone call in case the supplier was unwilling to put any concerns in writing.
If you have any doubts about their creditworthiness, you should ask yourself whether you want to offer them credit at all. You may be able to negotiate cash in advance, or might be better off not having them as a customer. In any case, you should only allow customers a sensible credit limit, reflecting how risky you think they are and how much your business could afford to have tied up in overdue payments or bad debts.
Make sure you have a good credit control system that encourages prompt payment. This should include everything from having the right terms and conditions to chasing up payments. Watch out for any warning signs such as increasing payment delays.
You may also want to consider using a factoring company. In return for a fee, the factor advances you most of the value of outstanding invoices, chases payment on your behalf and takes on the risk of bad debts.
Initially you should assess the customer’s creditworthiness — for example, by getting an online credit rating. You may want to consider rechecking credit ratings from time to time, or if the customer asks for an increased credit limit, in case their creditworthiness has deteriorated.
Warning signs that may raise concerns include:
A trend of increased payment delays.
Making partial payments rather than settling the full account.
Asking for a longer credit period.
Increased purchases — if this is a sign that other suppliers have cut them off.
Delaying tactics, such as sending cheques that have been accidentally left unsigned or telling you that the bookkeeper is on holiday.
Industry news may also alert you to a potential problem, for example if your customer loses a major contract of their own.
You can agree any reasonable credit period between yourselves. While this is up to you, you may find it difficult to compete unless you offer the same sort of terms as other businesses in your industry.
If your terms and conditions do not specify a credit period, then the credit period is 30 days from the invoice date or delivery date (whichever is later).
There are also rules to protect you against being forced to offer customers unfairly long credit periods. Normally business customers can’t expect more than 60 days, and public sector customers 30 days, unless there is a good reason.
The costs of a shareholders or partnership agreement can vary significantly, depending on how complex the agreement is and how much time it takes to reach an agreement. A straightforward agreement might cost as little as a few hundred pounds.
To keep costs down, it helps if the individuals involved discuss their priorities and concerns amongst themselves first. You can then involve your lawyer, who can help you to explore any issues you haven’t considered and turn the final agreement into a written document.
Normally it is unnecessary for each individual to take their own legal advice. Instead, your lawyer works with all of you, helping you reach an agreement that suits everyone.
A free, no obligation enquiry will help you get a clear understanding of the best way to proceed and the likely costs for your particular circumstances.
Typically a company’s articles of association cover the main administrative issues: for example, how directors are appointed, the voting procedure at shareholder or board meetings, and how shares are transferred.
A shareholders agreement can cover similar ground but often also looks at broader issues, such as how the company is funded, what the policy is on paying dividends, what happens if someone offers to buy the company and so on.
Often there is a choice whether to include particular terms in the articles of association or in a shareholders agreement. Each can be effective, but there are differences. For example:
If the shareholders are likely to change frequently, you may want to include key terms in the articles of association. A shareholders agreement only binds those individuals who agree it at the time, whereas the articles continue to govern how the company is run regardless of who the shareholders are.
Unless otherwise agreed originally, a shareholders’ agreement can only be changed unanimously. Changes to the articles can usually be made by special resolution (with the agreement of 75% of votes cast) unless the articles include extra restrictions.
The articles of association are a public document whereas a shareholders agreement can be kept confidential.
Your lawyer can advise you on which terms it is best to include in each.
It depends what terms and conditions apply to the agreement between you.
If you fail to deliver what has been agreed, or deliver faulty goods, then you have failed to fulfil your side of the contract. In these circumstances, the customer may not be obliged to pay you — or might even be entitled to make a claim for any loss they suffered as a result.
The right terms and conditions will protect you: for example, allowing you to make partial delivery, limiting any liability for faulty goods and so on. As a practical matter, your terms and conditions should require the customer to notify you of any missing or faulty goods within a specified time limit.
You may be able to encourage customers to pay you more quickly. For example, you could offer a discount for cash payment.
You should also consider whether you can free up any of the other money you have tied up in working capital. For example, you might sell off old stock, control your purchases more closely or ask your own suppliers for extended credit terms.
You may also want to look at financing options, such as factoring or invoice discounting. This allows you to receive most of the value of outstanding invoices without waiting for customers to pay. Factoring may well be an option if your annual credit sales are at least £50,000—£100,000 and are not concentrated with a handful of customers.
If you cannot reduce your cash flow problems in any of these ways, you may have to consider restricting credit sales: even if that means slowing the growth of your business and reducing profits. Overtrading beyond the turnover your cash flow can support is a common cause of business insolvency.
You should make it clear throughout your dealings with the customer that you expect prompt payment. Draw their attention to the credit period when they first apply for credit. Make sure you invoice promptly and follow up with regular chasing if necessary.
You may want to consider including incentives to pay promptly as part of your terms and conditions. For example, you might offer a prompt payment discount or settlement rebate for good payers.
Credit control can be much more effective if you make phone calls when appropriate rather than just sending emails and letters. A polite and friendly attitude can make a significant difference.
It’s worth being aware that many customers only pay their suppliers at weekly (or even monthly) payment runs. You should check whether your customers have regular payment runs — and if so, try to ensure that invoices reach them beforehand.
The key is to make sure that your customer is made aware of your terms and conditions before the sale is agreed. Relying on including a copy of your terms and conditions on the back of your invoices is not good enough. By the time the customer sees the invoice, the sale has already been agreed.
One option is to provide a copy of your terms and conditions as part of your credit control process when a new customer applies for credit. Ask them to sign a confirmation that they have read and understood them. And make sure you highlight key terms, such as the credit period. It’s no good hiding away important details in the ‘small print’.
Normally an agreement can only be changed by unanimous agreement among the shareholders or partners. A deed of variation, or an entirely new agreement, will need to be drawn up and signed by all the shareholders or partners.
The first step might be to escalate the issue. Instead of having your credit controller or bookkeeper talk to their purchasing department, try making a phone call yourself and asking to speak to the customer’s managing director. Make it clear, firmly but politely, that you need to paid, now.
You should also consider putting the customer on ‘pro forma’ or credit stop. Until the customer pays off their outstanding balance, you will not make any further credit sales to them.
If these measures still do not produce payment, you should consider asking your solicitor to send a solicitor’s letter. In effect, this is the first stage of taking legal action. The costs are low, and the letter is often enough to convince the customer to pay.
Failing that you may want to consider further legal action. Factors to consider include the value of the debt, the costs of pursuing it and how likely you are to recover what you are owed. You should take legal advice.
A partnership or shareholders agreement should anticipate the eventual departure of a partner or shareholder. Sooner or later, an individual may want to retire or to realise part or all of their investment in the business. An exit may be the best way to resolve a difference of opinion on how to take the business forward. Or an individual might die or become incapacitated.
Without an agreement, these sorts of situation tend to lead to disputes and undesirable outcomes. A good agreement can protect the interests both of the individual who is leaving and the remaining partners or shareholders.
Key issues to consider include:
How any shares or interest in the partnership will be valued.
Who shares can be sold to, and whether the existing shareholders will have the right of first refusal.
Where the remaining shareholders or partners are buying out an individual, how they will be able to finance this.
How the interests of various shareholders can be balanced — for example, if a majority shareholder wishes to sell.
What will happen to an individual’s shares (or partnership interest) if they become insolvent, get divorced or die.
What will happen if an individual is no longer able to carry out their role.
What will happen if the owner-managers or business partners no longer wish to work together — for example, whether an individual can be forced out.
What notice is required if an individual wishes to leave the business or sell their shares.
Any restrictions that will apply after someone has resigned — for example, stopping them working for a competing business.
Outside investors want to be sure what business they are investing in, and to protect themselves from being taken advantage of by insiders. Typically they might look for an agreement to include terms such as:
The right to veto major decisions — such as significant capital investment or borrowing, the takeover of another business, or major changes to what the company does.
The right to appoint a director to the company’s board.
Restrictions on dividends and on how much executives can be paid.
An obligation for the company to provide regular updates on performance
A right of first refusal if the company needs to raise additional investment later or if another shareholder wishes to sell shares.
Restrictions preventing key individuals from competing with the company (both while an employee or director and for a period after leaving).
None of these will necessarily be unreasonable, but you do need to be careful. It can be tempting to agree too easily when you are keen to get an investment. The biggest problem can be a fundamental difference in priorities between the investor and yourself: for example, if a venture capitalist is focused on achieving a profitable exit over the next few years.
In general, no — not automatically. As part of the process for getting the new partner or shareholder involved, they should sign a document confirming that they agree to the original agreement’s terms.
This may also be an opportunity to review your partnership or shareholder agreement. You should check that its terms still reflect your wishes and how the business has changed since the agreement was first drawn up.
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