In case of dispute between shareholders, directors or partners – what precautions may help?

Mr. Anish and Mr. Naveen, middle aged Software professionals came to our office to set up their dream venture in Feb 2013. Both of them chose to do their own venture and gaveup cozy corporate jobs. When they ran their business model presentation, I was very excited about their plans. Each of them invested close to Rs.20 Lakhs till August, 2014. Though their business concept was good, like any other business, expenses overshot the budget and the revenue never met the projections! (This could be one of the reasons of dispute among themor any partners or shareholders)

Few days back, the first call I got was from Mr. Naveen. “I need your time to discuss about our company’ His voice was fragile and he easily sounded like an aggrieved party. By noon, as I had anticipated, I got a call from Mr. Anish. He was straight in his approach. “Don’t hold any discussion with Mr. Naveen in my absence. I have discovered that he is taking me for a ride. I am contemplating to issue a legal notice to him’.

Disputes – is a part of life. Tell me, who does not have disputes. If not among human beings, can trees or plants have disputes?

We called a joint meeting between Anish and Naveen at our office. They started blaming each other, as if there is no end to their problems. How to ascertain who is right?

The long preamble is written to bring the seriousness of maintaining adequate records and documents in a business enterprise. Be it a company or a partnership firm, when 2 or more people join together to run a business, all crucial and critical decisions are to be taken on mutual consent of all. All the decisions have to be documented and signed by all concerned.

Board Meetings – In case of companies, the Companies Act 2013 prescribes meeting among directors once in 4 months (for private limited companies). The Act expects that a formal Notice of the meeting to be issued, agenda of the meeting to be circulated and the discussion of the meeting to be documented and signed.

When things are going good, the above procedure appears to be a matter of ‘ridiculous rules by the government’. The value of such documents will only be felt in difficult days.

In case of partnership firms, there is no formal requirement by the law for conducting partners meeting. However, in the best interest of the partners, I suggest to maintain a minute book to document the decisions.

I have observed that the Directors/partners find it ‘expensive’ to pay the professional fee for secretarial work. But the cost of non-compliance or the cost of resolving the disputes will be many folds.

Suggestions – In this backdrop, we suggest the following –

• Maintain a minute book (as desired by the law or otherwise) where the important decisions are documented and signed by all the concerned people
• In case one of the partners/shareholders is handling cash / cash related activities, make the process very transparent so that at any point of time in future, one needn’t blame the other.
• Evaluate the report card of each of the partners regularly.
• Let all the partners speak in the same language to the outside world.
• Take collective decision in a way the other partner should not get any chance of finding gaps later.
• Take the help of professionals (CS/CA) for documentation work.
• Use Technology – It would be good to jointly operate a bank account. Unlike in the past, you needn’t sign a physical cheque. Try and use internet banking, use ‘maker and checker’ facility or joint signature facility.
• Take a copy of important documents such as partnership deed/incorporation certificate, PAN card copy, shareholder agreement, etc and keep them at your home

Hope this article will be of some help to you.

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