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Alex J.
Alex J., Solicitor
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Experience:  Solicitors 2 years plus PQE
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Tech company has developed a product, and in order to take

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Tech company has developed a product, and in order to take it to the market, Director (sole owner of the company A), sets up separate company B with another party, 50/50. Patent is filled and paid for by the Company A, majority of equipment is bought by Company A and "rented out" in a sense (no actual rent is charged) to Company B. Most of the materials for the development of the product is bought by the Company A. Director of the Company A wants to review the shareholding, and give 20% to his Company A. So, shareholding in the Company B would be Company A 20%, Director of Company A 40% and the other Director of Company B 40%.
Two issues - second director of the Company B seems to struggling to understand why expenditure by Company A for Company B needs must be recorded as loan from A to B, and not as expenditure of Company A. Second, he doesn't like the idea of loosing his share to give 20% to Company A (which is done with additional investors coming onto the scene in the future in mind). How do I explain all this, with reference to an actual letter of law, not just because I know, that these two companies must be kept separately, as far as the finance goes?
Submitted: 2 years ago.
Category: Law
Expert:  Alex J. replied 2 years ago.

Hi, Thank you for your question and welcome. My name is ***** ***** I will assist you. I am a company law expert. Can I clarify one point, if Company A is not going to receive a shareholding and/or have its contribution registered as a loan, does the second director just expect Company A's contribution for free? Kind regards AJ

Customer: replied 2 years ago.

The intention is for the company A to receive income from the proposed 20% eventually, but at the moment company B is not bringing any income, only expenditure. So, at the moment, all expenses paid for by the company A on the project, are recorded as a loan from A to B, which could be then converted into the investment. The main concern is for the company A to get maximum value out of the project, which is essentially, company A's baby.

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
My apologies for the delay. Is there any written agreement between Company A and Company B?
If it is understood that this is a loan then by not recording it as a loan in Company B's accountants the directors would be behaving negligently. Directors have fiduciary and statutory duties under S.172-S.177 of the Companies Act 2006. Specifically by not accurately recording the arrangement properly the director could be in breach of S.172 and S.174 - not acting in the best interests of the company or exercising reasonable care and skill.
Also if you present a balance sheet to an investor without these loans recorded as loans, that is potentially fraud. An investor is going to want to know if Company A has any claim on Company B's assets.
In terms of diluting your shareholding that is a commercial decision - when Company A gave you its resources was it always understood you would give Company A shares?
I look forward to hearing from you.
Kind regards
AJ
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