When the shareholders of a company can no longer work together to achieve the company’s aims, eligible shareholders can seek relief from the court by petitioning to wind up the company on the grounds that it is ‘just and equitable’ to do so pursuant to Section 122 (1) (g) of the Insolvency Act 1986 (‘the 1986 Act’)).
However, in these circumstances, the court’s ordinarily wide discretion to wind up the company under section 122 (1) (g) is narrowed significantly by Section 125 (2) of the 1986 Act which states that:-
“the court, if it is of the opinion:
(a) that the Petitioners are entitled to relief either by winding up the company or by some other means, and
(b) that in the absence of any other remedy it would be just and equitable that the company should be wound up, shall make a winding-up order; but this does not apply if the court is also 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.”
What Does this Mean in Practice?
The High Court recently considered one such petition in the case of Mr J Taylor v The Whitehall Partnership Limited and Mrs J Taylor [2023] EWHC 596 (Ch). Although not authoritative, the judgment provides an illuminating example of how the legal principles are applied and judicial discretion is exercised.
The Petition
A husband (‘the Petitioner’) contended the company he formerly ran with his sole co-director and shareholder (his ex-wife) was deadlocked as they had gone their separate ways, their relationship of trust and confidence had irretrievably broken down, his ex-wife (‘the Respondent’) was refusing to engage with him, had set up another business and made complaints to the Financial Conduct Authority (‘FCA’) and Ombudsman about the company and him personally, and refused to obtain a joint valuation of the shares.
The Respondent opposed the petition contending the husband had excluded her from the affairs of the company and that, inter alia, an independent third-party professional should be appointed with a casting vote to break the deadlock.
The Case Law
The judgment cites a summary of the following relevant case law principles: -
The remedy of winding the company up on the ‘just and equitable’ grounds is exceptional as between shareholders (who can alternatively present an unfair prejudice petition under section 994 of the Companies Act 2006) and one of last resort (Fulham Football Club (1987) Ltd v Richards [2012] Ch 333).
The judge should consider whether it is ‘just and equitable’ (construed widely - Re St Piran Ltd [1981] 1 W.L.R)) that the company should be wound up, taking into account ‘all relevant matters’ as at the date of the hearing (Lau v. Chu [2020] UKPC 24), including the availability of alternative remedies, the other shareholders’ wishes, the financial impact upon the company and the conduct of the Petitioner.
The Petitioner must come with ‘clean hands’. The order should not be made if the Petitioner is responsible for the deadlock and break down of trust and confidence between the parties (Re Westbourne Galleries Ltd, Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360).
The Petitioner must evidence they will derive a tangible benefit from the order being made, typically a distribution to members upon liquidation (Re Rica Goldwashing Co Limited (1879) 11 Ch D 36), but not limited to this (Re Chesterfield Catering Co Limited [1977] Ch 373).
The court will not make an order winding up the company if the petitioner’s motive for petitioning ‘is to further some collateral purpose or objective, not related or connected with his shareholding: see, by way of example, Re Bellador Silk Ltd [1965] 1 All ER. 667’ as this would amount to an abuse of process.
The Issues
At trial the judge accepted the company was deadlocked and the parties’ relationship of trust and confidence had broken down, and went on to determine the following issues: -
a) Whether there is some other remedy available to the Petitioner and, if there is, whether he is acting unreasonably in seeking to have the Company wound up rather than pursuing that other remedy.
Counsel for the Petitioner and the Petitioner failed to give any reason as to why an order appointing an administrator would not be more appropriate than an order for winding up.
The judge did not accept that the Petitioner discontinued an earlier unfair prejudice petition under section 994 of the Companies Act 2006 because of the expense involved.
The Petitioner’s expired open offers of settlement to the Respondent all offered to buy her company shares rather than offering to sell the Petitioner’s shares to her. The judge considered the Petitioner’s refusal to re-instate his offer to buy the Respondent’s shares during the trial showed he was not prepared, even at trial, to consider a reasonable alternative remedy.
b) Whether the Petitioner is solely responsible for that deadlock or the loss of trust and confidence between them. Even if he is not solely responsible for it, whether he is mainly responsible for it, even if it may also have been caused, to some minor extent, by the conduct of the Respondent.
Following cross examination of the Petitioner, the Respondent and a sole company employee, the Judge held there was no substance to the Petitioner’s allegations that the Respondent was at least in part responsible for the company deadlock or loss of trust and confidence. The following facts were key to this finding: -
The Petitioner had, following their divorce, unilaterally attempted to cancel the Respondent’s directorship and wrote to the FCA attempting to remove her regulatory authorisation twice.
The Petitioner complained of the Respondent setting up a separate company by herself, but had set up his own enterprises, provided ‘woeful’ disclosure in respect of them, and allowed one of the enterprises to use the company’s IP.
The Respondent acted reasonably by seeking to defend the unfair prejudice petition and refusing to jointly appoint expert valuers proposed by the Petitioner who she considered lacked independence.
The Respondent could not be criticised for pursuing complaints through proper channels (the FCA and Ombudsman) even if these complaints were not upheld.
(c) Whether the Petitioner will receive some tangible benefit from the winding up of the Company in his capacity as Petitioner, such as to make it possible for him to prosecute the petition.
The judge was doubtful that the company was solvent on a balance sheet basis or that there would be any distribution to the Petitioner upon wind up.
He did not accept the submissions of counsel acting for the Petitioner that putting a dysfunctional company to bed equated to a ‘tangible benefit’.
(d) Whether the Petitioner seeks the winding up order for a purpose or purposes not connected with his shareholding, but for an ulterior or collateral purpose.
The Petitioner was not interested, despite the judge suggesting it several times during the trial, in getting the best value for the assets of the company by placing it into administration. The judge inferred from this that the only reason he was petitioning to wind the company up was to avoid paying the Respondent for her shares, whilst continuing to trade through his new enterprises, which had already poached some of the company’s former clients.
Outcome and Take Aways
For the reasons above, the petition was ultimately dismissed. Within the judgment, the judge noted that had the Respondent been legally represented, it is likely her advisors would have recommended making an application to court to strike the petition out, on the grounds that it showed no reasonable prospects of success and there was no other compelling reason why it ought to have been dealt with at trial (which ultimately lasted for six days).
The decision should serve as a cautionary tale to shareholders considering issuing this type of petition tactically by highlighting the limited circumstances in which the court will grant relief. From the Respondent’s perspective it also emphasises the importance of obtaining specialist legal advice at the outset of a dispute. In addition to the judge’s observations above, formally engaging solicitors at the outset could have improved the chances of a settlement being achieved before and / or during the earlier set of unfair prejudice proceedings, avoiding the second set of proceedings entirely.
Should you require advice in respect of a business dispute please contact our commercial litigation team by emailing anna.barnes@salehs.co.uk or carly.borne@salehs.co.uk or telephoning 0161 434 9991.