S.994 Flashcards
Embrahimi v Westbourne Galleries Ltd [1973] AC 360
Just and equitable winding up for exclusion from participation in a small private company where there was a relationship based on mutual confidence.
Wanted a just and equitable winding up under IA 1986 s.122(1)(g); as P had agreed the formation of the company intending that their business relationship would remain the same as their prior partnership, his exclusion was a breach of that understanding. It was therefore just and equitable to wind up the company.
Lord Wilberforce listed the typical elements in petitions brought under this ground:
(i) The basis of the business association was a personal relationship and mutual confidence (generally found where a pre-existing partnership has converted into a limited company);
(ii) An understanding that all or certain shareholders (excluding ‘sleeping’ partners) will participate in management;
(iii) A restriction on the transfer of members’ interests preventing the petitioner leaving.
The court can subject the exercise of legal rights to equitable considerations… “which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way”. They must point to a special underlying obligation of other members in good faith or confidence so long as the business continues.
It is not necessarily right to refer to semi-partnerships/quasi-partnerships as they often have such relationships, but it is not always correct, use the test.
In many/all of the cases there has been pre-existing partnership obligations of which it is reasonable to suppose continue to underlie the new company structure.
Lord Wilberforce emphasises the wide discretion of the court and how there is not an exhaustive list of categories under which a case may be brought
Pennell’s Case (July 25th 1974, unreported but see (1981) 44 MLR 41-49 and 57-60)
Templeman J strengths the position of the minority shareholder by applying statements rom the HL speehces in Ebrahimi to a situation where no petition had been presented for winding up the company; quasi-partnership without a pre-existing partnership agreement; there was an express contract that the shares would be split 51:49 at a constant ratio unless both factions agreed otherwise; there was an inferred understanding that any increase in share capital would be subject to the consent of the plaintiffs
Burridge (1981) on Pennell’s Case
Templeman J’s extension of the principle to a company which is still a going concern is the most novel feature of the case; it was likely T only applied this case because he was struggling to find another appropriate resolution.
Did LW mean that the exercise of legal rights is always subject to equitable considerations or that there is always jurisdiction for it? Likely the latter
O’Neill v Phillips [1999] 2 All ER 961 (House of Lords)
FACTS:
P gave O a 25% share and allowed him to draw 50% of the profits; P retired leaving O as sole director and talks began about increasing O’s shareholding. When the recession hit P removed O as director and withdrew his share of the profits. I took steps to leave the company.
JUDGMENTS:
Fairness is the criterion by which the courts will decide relief.
A member will not ordinarily be able to complain of unfairness, unless there has been some breach of the terms on which he agreed the affairs of the company should be conducted. However, there will also be cases where equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers.
Virdi v Abbey Leisure Ltd [1989] BCLC 619 (Hoffmann J)
Dealt with as though V’s claim was for an order under s 122(1)(g) and, although there were grounds for holding that it would be just and equitable to wind up the company, he would not make an order as V was behaving unreasonably within the terms of 125(2) of the 1986 Act in not accepting an offer of A and O to purchase his shares and have the valued according to art 27 .
Virdi v Abbey Leisure Ltd [1990] BCLC 342 (Court of Appeal)
Allowed, there was the risk that an accountant in carrying out a valuation under art 127 of the company’s articles might value V’s shares at a discount because he was a minority shareholder and there was nothing unreasonable in V refusing to accept the risk. In a winding-up the liquidator would be in a better position than a valuer to determine the value of V’s claim and to ensure that the price paid to V for his stake was similar to that paid to another shareholder for a similar stake.
Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Chancery Division)
A derivative claim was refused because there were alternative remedies.
When decided whether to make a claim, a hypothetical director acting in accordance with s 172 would consider:
- Prospects of success of the claim
- The ability of the company to make recovery on any award of damages
- The disruption which would be caused to the development of the company’s business by having to concentrate on the proceedings
- The costs of the proceedings
- Any damage to the company’s reputation and business if the proceedings were to fail
If there has been an offer to buy out the shares it is simply an issue of valuation
The court must consider whether the member has alternative personal claims which could be pursued in his own right rather than on behalf of the company: s.263(3)(f)
F’s real concern was that under an unfair prejudice petition, due to the financial situation of the company, he may not be able to achieve a fair price for the shares.
It is not relevant to the case that there may be a future derivative claim so it is more efficient to simply resolve it now.
Re Saul Harrison & Sons [1995] 1 BCLC 14, [1994] BCC 475 (Court of Appeal)
FACTS: Alleged by class C shareholder (who had no right to vote) that the directors had continued to unfairly run the business at a loss so they could pay themselves high salaries. They should have closed down the business and distributed the assets to the shareholders.
JUDGMENT:
On the facts, there was no unfairly prejudicial conduct, the BoD where bound to manage the company in accordance with their fiduciary obligations, the AoA and the CA. The unfair prejudice action does protect certain legitimate expectations, akin to those which may affect one’s conscience in equity, from being disappointed. But here there was no legitimate expectation for more than the duties discharged, and so no obligations had been breached.
S.122(1)(g) IA 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’
As draconian there must be strong grounds to convince the court to grant the remedy
Re German Date Coffee Co (1882)
Just and equitable winding up granted as substratum has failed.
Jessell MR explains that the minority shareholders did not enter into partnership on those terms.
Much less relevant now as objects clauses are not needed: s.31(1) CA 2006
Re Thomas Edward Brrinsmead & Sons (1897)
Piano fraud case: where a company is formed to perpetuate fraud and winding-up represents the best for its shareholders recovering money invested by them from its promoters the court may grant a winding-up order on the just and equitable ground.
Ye Yenidje Tobacco Co Ltd (1916)
May be wound up for total/practical deadlock.
In this case equal shareholders with equal voting rights where the only directors; relations became acrimonious and they refused to communicate with each other. Although a substantially profitable company, the court ordered a winding-up.
Cozen-Hardy MR inspired by the law of partnership said winding-up would be ordered as the relationship had no hope of reconciliation.
Lock v John Blackwood Ltd
Winding-up may be allowed for justifiable loss of confidence in the company’s management (substantial overlap with deadlock).
The majority shareholder dominated the BoD and regarded the business as his own, in order to induce the minority shareholders to sell their shares at an undervalue, he refused to declare dividends. GMs where not called and accounts where not published.
Lord Shaw:
The lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company’s business. Lack of confidence may not spring from dissatisfaction at being outvoted or “domestic policy” of the company.
Re A and BC Chewing Gum Ltd (1975)
Curious application of Ebrahimi principles:
o The minority shareholder P was being refused their entitlement (by shareholder agreement) to appoint a director
o A winding-up order was made following LW’s approach on the basis of P’s exclusion from management in breach of the fundamental understanding from the outset that it would participate in management
o This decision has been criticised: an injunction to enforce shareholders agreement would have been more appropriate
Re Zinotty Properties Ltd (1984)
More straightforward application of Ebrahimi
o The court considered it just and equitable to wind up the company despite that fact that it was in voluntary liquidation
o P’s allegation was based on breach of trust and confidence on the grounds that he had not be appointed as director as he had expected
o The company, a property business, had not been dissolved when a site-development was completed as he had assumed it would be but instead interest-free unsecured loans had been made to other businesses which he had no interest in
o No GM or proper accounts maintained; the court found a breach of trust and confidence, a petitioner not appointed as a director as promised, other things not completed, made interest free loans to another company, no GM, unprepared accounts… court felt it fair to wind the company up using Ebrahimi
Clemen’s v Clemen’s Bros Ltd (1976)
Ebramhimi: LW’s principles go beyond the statutory context of just and equitable winding up; dovetails with the HL decision in O’Neill v Phillips.
Is this a good idea when the niece had been uncooperative in the running of the company?
Section 152(2) IA 1986
The court will not grant a winding-up order if it is of the opinion ‘both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy’.
The fact that there is a wider range of relief available under s 994 of the CA 2006 does not of itself make it unreasonable to seek a winding-up order
Re Copeland & Craddock Ltd (1997)
Dillon LJ: it should not be inevitable that if someone can claimed under s 994 that they cannot claim winding-up
Re Woven Rugs Ltd (2008)
Generally winding-up should be seen as a last resort and alternative relief being available, such as s.994, will normally result in the winding-up petition being struck out
Re a Company (No 002567 of 1982) (1983)
Vinelott J found that as the shareholder had said from the start the would be prepared to sell shares if a fair price was offered and R had offered the shares at a fair valued price without discount… the company could not be wound up.
Thought that it was unlikely a shareholder in Ebrahimi’s position in the Westbourne Galleries case would be excluded from relief under s.994
Virdi v Abbey Leisure Ltd (1990)
The company had been formed for a single venture which had been complete, so the minority shareholder was not unreasonable in asking for winding up despite there being procedures in place to get a fair value for the shares… an accountant valuing V’s shares might apply a discount to reflect his minority shareholding where-as on winding up the liquidator would be in a better position to ensure the price paid to V was similar to that paid to another shareholder for a similar stake… Balcombe LJ stressed that the company’s assets consisted almost entirely of cash which made it unreasonable for V to accept the risk of his interest being discounted
Re Noble & Sons (1983)
There is some authority to suggest that if the petitioner is substantially at fault for the breakdown in relations with his co-venturer he may be denied relief under s 994 yet, paradoxically, succeed in a petition for a just and equitable winding-up.
No requirement for “clean hands” under s.994 but if they have been behaving badly less likely to have behaviour deemed “unfair”.
