Just and Equitable Winding Up Flashcards
This remedy is set out in
s 122(1)(g) Insolvency Act 1986:
“A company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up.”
Who can bring a petition?
Section 124(1) IA provides that an application to the court for a winding-up order may be made by a “contributory”.
Why will courts attempt to find other remedies where possible?
Because it is a draconian remedy of last resort, resulting in the end of the life of the company.
Consequences of a just and equitable winding up petition
Section 127 IA 1986 provides that:
The company is in effect paralysed pending the outcome of the petition.
Banks will freeze company bank accounts as soon as they receive notice of such a petition.
Circumstances in which just and equitable winding up has been appropriate
- Substratum has failed
- Fraud
- Deadlock
- Justifiable loss of confidence in the company’s management
- Exclusion from participation in a small private company where there was a relationship based on mutual confidence
Ebrahimi v Westbourne Galleries Ltd
This case concerned a rug business which had been run by E and N as a partnership for over a decade. In 1958 a company was established to take over the business and initially E and N were the only directors and equal shareholders. N’s son then joined the company as a director and shareholder, meaning that E became a minority at both board and shareholder level. The parties fell out and E was voted off the board but retained his shares. No dividends were paid to him, as all the profits were distributed by way of directors’ remuneration. E petitioned the court for a winding up order under s 122(1)(g) IA 1986 and alternatively for relief under the “oppression remedy” in the Companies Act 1948, which was the precursor to the unfair prejudice remedy. The House of Lords concluded that although E had been validly removed as a director under the Companies Act, as the company had been formed on the understanding that E would remain in management, his exclusion was in breach of that understanding and therefore it was just and equitable to wind up the company. This company was held to be a “quasi-partnership”.
Grounds for petition
Lord Wilberforce said that the remedy gave the court a wide discretionary jurisdiction. He considered it important not to create categories or particular grounds on which a claim for just and equitable winding up can be brought. Cases should be considered individually. Generally speaking, successful petitions for just and equitable winding up usually result where the relationship between directors and/or shareholders has broken down to the extent that it is not possible for the company to be run effectively. Examples of this include the final three grounds discussed below: deadlock (where the parties are not able to reach a decision), justifiable loss of confidence in the company’s management and exclusion from management
This is a draconian remedy and therefore will only be ordered on compelling grounds.
- Substratum has failed
Where the petitioner establishes that the commercial object for which the company was formed has failed or been fulfilled, this will be a ground for just and equitable winding up. Note that this ground is of much less importance now as s 31(1) CA 2006 provides that a company’s objects will generally be unrestricted.
Re German Date Coffee Co :In this case the company was registered with the object of acquiring a German patent for manufacturing a coffee substitute from dates. The German patent was not granted, although a Swedish patent was. The company built up a prosperous trade in the coffee substitute, but despite this the Court of Appeal made an order for the company to be wound up on the basis that the whole substratum of the company was gone. The company had been established not for the general purpose of making coffee from dates but to work a particular patent, and as that patent did not exist, the company could be wound up.
- Fraud
Where a company has been formed to perpetrate a fraud and winding up represents the best way for its shareholders to recover the money they invested, the court may grant a winding-up order.
Re Thomas Edward Brinsmead & Sons: In this case three men who were named Brinsmead were former employees of John Brinsmead & Sons, a renowned piano manufacturing company. They formed Thomas Brinsmead & Sons to make pianos which they passed off as manufactured by John Brinsmead & Sons. The court held it to be just and equitable to wind up the company and return the money to the shareholders since the purpose of the company was fraudulent.
- Deadlock
It is rare for there to be total deadlock in the management of a company since the chairman generally has a casting vote at board meetings. However, where deadlock does occur the court may order the company to be wound up.
Re Yenidje Tobacco Ltd [1916] 2 Ch 426, CA: Here two tobacco manufacturers formed the company to merge their businesses. They were equal shareholders and the only two directors. The relationship between the two became acrimonious to the point that they refused to speak to each other and would only communicate through the company secretary. Despite the fact that the company was profitable, the court ordered it to be wound up.
- Justifiable loss of confidence in the company’s management
This ground overlaps with the deadlock ground above. Where a company is in effect a quasi-partnership, the court may order it to be wound up where there is a lack of confidence in the management.
For this ground to apply there needs to be a lack of probity in the way the company is being run by the majority, effectively driving the minority out so that it is unjust and inequitable to require the minority to remain shareholders, therefore justifying the winding up.
Loch v John Blackwood Ltd [1924] AC 783, PC:The majority shareholder in this company dominated the board of directors, refused to declare dividends, call general meetings or publish accounts, aiming to induce the minority shareholders to sell their shares at an undervalue. The Privy Council ordered the company to be wound up.
- Exclusion from participation in a small private company where there was a relationship based on mutual confidence
This was the situation in Ebrahimi v Westbourne Galleries (above). Lord Wilberforce listed the typical elements in petitions brought under this ground as:
(i) the basis of the business association was a personal relationship and mutual confidence (often where a pre-existing partnership converts into a limited company);
(ii) an understanding that all shareholders will participate in management;
(iii) a restriction on the transfer of members’ interests preventing the petitioner leaving.
He concluded that just and equitable winding up would be appropriate where the petitioner:
“can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved.”
Relationship with other remedies
Section 125(2) IA 1986 provides that the court will not grant a winding-up order if there is another remedy is available and the court is of the opinion that the petitioners are “acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy”.
The winding-up remedy is usually viewed as a last resort, so if any alternative remedy is available, the winding-up petition will be struck out. For example where the articles of association provide a procedure for a shareholder to sell their shares at a fair price and without discount, any petition for winding-up is likely to be struck out on the basis that the petitioner is acting unreasonably in seeking a winding-up order (eg Re a Company (No 002567 of 1982) [1983] BCLC 151).
A key remedy which may often be available is an action in unfair prejudice (s 994 – 996 CA 2006).
Who is a ‘contributory’?
“Contributory”- any person liable to contribute to the assets of a company in the event of it being wound up, which includes every past and present member.
For a fully paid up shareholder to bring a petition, they must show
a “tangible interest in the company”. This has been held to mean that the shareholder must prove (on the balance of probabilities) that there will be a surplus among the shareholders after payment of the company’s debts, liabilities and the expenses of the liquidation (Re Rica Gold Washing Co (1879)
If the shareholder cannot prove surplus assets, they may also establish a tangible interest by showing that they would achieve some advantage or avoid or minimise some disadvantage which would accrue to them as a member if the company was wound up (Re Chesterfield Catering Co)
