Just and Equitable Winding UpCompany LawInsolvency & Restructuring Published June 2018
David Alexander QC on when the court will and won’t make an order under Section 122(1)(g)
When a shareholder dispute emerges in a company, a disgruntled shareholder has a number of possible means of seeking redress in England and Wales. Depending on the facts and the nature of the dispute, he or she may have a personal remedy (e.g. an injunction). He or she may have a right to enforce articles or a shareholders’ agreement. He or she may have the ability to bring a derivative claim on behalf of the company. He or she may have the ability to bring a statutory based claim, namely an unfair prejudice claim under Section 994 to 996 of the Companies Act 2006 (“the 2006 Act”) or to present a winding up petition against the company under Section 122(1)(g) of the Insolvency Act 1986 (“the 1986 Act”) which provides that 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”.
The last of these possibilities, namely presenting a winding up petition on the just and equitable ground under Section 122(1)(g) of the 1986 Act, has diminished in importance over time in England and Wales since the introduction of an alternative remedy for shareholders, firstly by Section 210 of the Companies Act 1948 (a member could complain that the affairs of the company were being conducted in an “oppressive”manner), then by Section 75 of the Companies Act 1980 (which for the first time introduced a statutory remedy for unfairly prejudicial conduct) and then by Section 459 of the Companies Act 1985 and Section 994 of the 2006 Act (both of which maintained the unfair prejudice remedy). However the just and equitable winding up remedy still remains a significant one where, for example, winding up is the petitioner’s preferred choice of relief or where the petitioner considers that it may be the only relief that he or she may be entitled to. It is also significant and important in jurisdictions which do not have alternative unfair prejudice provisions, for example, in the Cayman Islands.
Who May Petition?
Winding up petitions on the just and equitable ground can be presented both by contributories (“every person liable to contribute to the assets of a company in the event of its being wound up: section 79 of the 1986 Act) and creditors. They can also be presented by the company itself and by its directors. However the most common use of the just and equitable winding up petition is where it is presented by a contributory.
Where a winding up petition on the just and equitable ground is sought to be presented in England and Wales by a contributory, under Section 124(2) of the 1986 Act that can only be done in certain circumstances, namely if:
1. The contributory is the sole shareholder of the company;
2. The shares which the contributory holds were originally allotted to him or her;
3. The shares which the contributory holds have been held by him or her and registered in his or her name for at least 6 months out of the 18 months before the presentation of the petition; or
4. The shares have devolved on him or her through the death of a former holder.
Where there is a dispute as to whether or not a petitioner falls within one or other of these categories, the position used to be that the court would require that dispute to be resolved before allowing a winding up petition to proceed. But since Alipour v Ary  1 BCLC 557 that has changed. Instead, since then, the court has two choices. It can either allow the question of standing to be decided on the hearing of the petition. Or it can insist that the question of standing be decided in other proceedings commenced for that specific purpose. In making that decision the court has to consider all the circumstances, including the likelihood of damage to the company if the petition is not dismissed. In addition to the above, a shareholder is not permitted to petition to wind up a company unless he or she has a tangible interest as a shareholder in the winding up of the company: Re Rica Gold Washing Co Ltd (1879) 11 Ch D 36 at 42-43 This is usually demonstrated by showing that there will be more than a negligible surplus for shareholders after payment of all of the company’s creditors (which facts should be expressly alleged in the petition and proved at the hearing: Re Martin Coutler Enterprises Ltd  BCLC 12). However it may also be capable of being demonstrated by showing that the shareholder will achieve some advantage, or avoid or minimise some disadvantage, which would accrue to him by virtue of his membership of the company: Re Chesterfield Catering Co Ltd  Ch 373; Hamilton v Brown  1 BCLC 269.
Grounds for Winding Up on the Just and Equitable Basis?
There are no rigid categories or headings under which cases must be brought in order to seek a just and equitable winding up. For as Lord Wilberforce said in Ebrahimi v Westbourne Galleries Ltd  AC 360, HL at 374h:
“… there has been a tendency to create categories or headings under which cases must be brought if the clause is to apply. This is wrong. Illustrations may be used, but general words should remain general and not be reduced to the sum of the particular instances.”
Instead when a petition is presented on the just and equitable ground, the court should have regard to the full factual matrix of each case: Re Sino Strategic International Ltd  FCA 709 (Aus Fed Ct).
Notwithstanding this, and despite the fact that it is therefore obviously impossible to set out all the situations where a court may make a winding up order on the just and equitable ground, it is undoubtedly helpful to at least consider the types of cases where courts have and have not made winding up orders in the past.
Where winding up orders have been made on the Just and Equitable basis
Winding up orders have been made in, among other instances, the following circumstances:
1. Where there had been a loss or failure of substratum or objects (e.g. a company was formed for a particular purpose which had been abandoned, come to an end or had otherwise become impossible to pursue): Re Suburban Hotel Co (1867) 2 Ch. App. 737 at 750-751; Re German Date Coffee Co (1882) 20 Ch D 169; Re Haven Gold Mining Co (1882) 20 Ch D 151; Re Perfectair Holdings Ltd  BCLC 423; Re Amalgamated Syndicate Ltd  Ch 2; Kingjade Holdings Pty Ltd v Pineridge Nominees Pty Ltd (1997) 15 ACLC 910. Thus:
a. As it was put by Sir George Jessel in Re Haven Gold Mining Co, supra, at 164:
“where the whole thing is gone, the majority cannot bind the minority to enter into an entirely new speculation.”
b. As it was put bby Jenkins J in Re Eastern Telegraph Co Ltd  2 All ER 104 at 109:
“…if a shareholder has invested his money in the shares of the company on the footing that it is going to carry out some particular object, he cannot be forced against his will by the votes of his fellow shareholders to continue to adventure his money on some quite different project or speculation.”
2. Where the company’s principal objects had been achieved: Re Abbey Leisure Ltd, Viridi v Abbey Leisure Ltd  BCLC 342. In such circumstances, again, the majority are not entitled against the wishes of the minority to seek to achieve different or new objects and a petitioner is entitled to have his or her investment returned.
3. Where the company was a mere “bubble” company (e.g. one which was only formed for the purpose, not of work, but of getting money from shareholders and which was from the beginning a “sham, a bubble, a trap”: per Lord Esher in Re Neath Harbour Smelting & Rolling Works (1886) 2 TLR 366 at 339 or one which was fraudulent from its inception): Anglo-Greek Steam Co (1866) LR 2 Eq 1; Re West Surrey Tanning Co (1866) LR 2 Eq 737; Re London and County Coal Co (1867) LR 3 Eq 355.
4. Where a company was formed to carry on an illegal business: Re International Securities Corpn (1908) 99 LT 581.
5. Where the company’s only business was ultra vires the company: Re Crown Bank (1890) 44 Ch D 634.
6. Where there was “deadlock” (e.g. where there has been a total breakdown of relations between two equal partners): Re Yenidje Tobacco Co Ltd  2 Ch 426, CA.
7. Where it had become impossible for a company to carry on business owing to failure of its internal constitution to work: Kingjade Holdings Pty Ltd v Pineridge Nominees Pty Ltd (1997) 15 ACLC 910.
8. Where there had been justifiable loss of confidence in management,for example, on account of fraud, serious misconduct and/or serious mismanagement of the affairs of the company by the directors and/ or majority shareholders: Loch v John Blackwood Ltd  AC 783; Re TE Brinsmead & Sons  1 Ch 406.
9. Where there had been a breach of the agreement contained in the articles and/or any shareholders’ agreement and/or any relevant statutory provisions: Re A & BC Chewing Gum Ltd  1 WLR 579.
10. Where there had been a serious breach or breakdown in the underlying basis upon which the company was set up, such basis involving a relationship of mutual trust and confidence (often described as a “quasi-partnership”) justifying the imposition of equitable considerations. As Lord Wilberforce explained in Ebrahimi v Westbourne Galleries Ltd, supra, at 379e-379g, typically the imposition of equitable considerations requires one of more of the following elements:
a. An association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company;
b. An agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; and
c. Restriction upon the transfer of the members’ interests in the company – so that if confidence is lost, or one member removed from management, he cannot take out his stake and go elsewhere.
11. Where there had been exclusion from management (in a quasipartnership): Thomson v Drysdale, 1925, SC, 311; Re A & BC Chewing Gum Ltd, supra.
12. Where there had been a failure to pay reasonable dividends in circumstances where (a) the company could afford to pay reasonable dividends and (b) the directors were paying themselves excessive remuneration: Re a Company (No 00370 of 1987) Ex p. Glossop  1 WLR 1068.
13. Where a company had been placed into voluntary liquidation but a minority satisfied the court that there are grounds for an investigation into the company’s affairs: Re Internet Investment Corp Ltd  1 BCLC 458.
What is Not Enough for Winding-up on the Just and Equitable Basis?
Just as it is possible to give illustrations of what will amount to grounds for a just and equitable winding up order, so it is possible to collect together illustrations as to what will not be enough to justify the grant of a winding up order on that basis. Among other things, the following would not appear to be sufficient:
1. A winding up order will not be granted just because the company is a small company: Ebrahimi v Wesbourne Galleries Ltd, supra, at 381f.
2. A winding up order will not be granted just because the company is a private company: Ebrahimi v Westbourne Galleries Ltd, supra, at 381f.
3. A winding up order will not be granted unless the petitioner comes to the court with “clean hands”: Ebrahimi v Westbourne Galleries Ltd, supra, at 387.
4. Mere lack of confidence on the part of the petitioner in those who conduct the company’s management is not enough to justify the making of a winding up order.
5. A winding up order will not be granted just because some shareholders take a pessimistic view of a company’s prospects but where the majority do not share that view: Re Agriculturist Cattle Insurance Co ex p. Spackman (1849) 1 Mac & G 170.
6. A winding up order will not be granted if the breakdown in confidence between members is because of the conduct of the petitioner: Ebrahimi v Westbourne Galleries Ltd  AC 360 at 387.
7. A petitioner is not entitled to have a company wound up merely because the petitioner wishes to turn shares into money.
8. The breakdown of a relationship of trust and confidence between shareholders probably cannot of itself justify winding up on the just and equitable ground: Hollington, Shareholders’ Rights, 9th Ed, at 10-01.
9. A winding up order will not be granted where the directors (without conferring on themselves any benefit apart from reasonable remuneration) decline to pay reasonable dividends for good commercial reasons.
10. A winding up order will not be granted where a petitioner seeks to protect interests other than his or her interests as a member: Re JE Cade & Son Ltd  BCC 360.
11. A winding up order will not be granted where a petitioner uses the proceedings to put pressure on a company, or for an improper purpose: Charles Forte Investments Ltd v Amanda  Ch 240.
12. A winding up order will not be granted if the petition was not presented “bona fide” but in order to achieve some collateral purpose and not genuinely to bring about the winding up of the company: Re JE Cade & Son Ltd, supra.
13. A winding up order will not be granted if the petition is designed to vindicate personal or business reputation (save where it is incidental to a decision as to whether relief sought is justified or not): Re FI Call Ltd  EWHC 3269 (Ch) at .
14. A winding up order will not be granted merely because a company is not prosperous: Re Langham Skating Rink Co (1877) 5 Ch D 669.
15. A winding up order will not be granted merely because a company’s chances of success are small: Re Kronand Metal Co  WN 15.
16. A winding up order will not be granted if there is an alternative remedy and the petitioner is acting unreasonably in failing to pursue that remedy: For Section 125(2) of the 1986 Act provides as follows:
2. “If the petition is presented by members of the company on the ground that it is just and equitable that the company should be wound up, the court, if it is of the opinion –
a. That the petitioners are entitled to the relief either by winding up of 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”.
The last of these reasons is particularly important. For the granting of a winding up order is a drastic and draconian remedy. It is also a fairly blunt instrument. It simply brings about the end or death of the company. As a consequence there is a natural reluctance to make winding up orders if there is a realistic alternative such as, for example, a buyout of one party’s shares by another. The same is true if satisfactory relief could be obtained by bringing a petition under Section 994 of the 2006 Act, by bringing alternative court proceedings or by some other means. The statutory provision plainly assists a court to avoid making a winding up order if it wishes to do so. In this regard, so far as a court is concerned, winding up on the just and equitable ground is a remedy of last resort.
Three further matters merit a mention in relation to just and equitable winding up petitions:
1. A winding up order should not be sought in England and Wales in conjunction with an application for relief under Section 994 of the 2006 Act unless winding up is the petitioner’s preferred remedy or the petitioner takes the view that winding up may be the only relief which he or she may obtain.
2. The question whether it is just and equitable to wind up a company is to be determined as at the date of the hearing of the petition. As a result a winding up order may be refused if circumstances have changed since the date on which the petition was presented: Re Fildes Bros Ltd  1 WLR 592.
3. Where the dispute in a just and equitable winding up petition is one which is really between rival shareholders, it is a misfeasance for those in control of the company to spend the company’s money in the proceedings, save in relation to things with which the company is directly concerned (e.g. giving disclosure of documents in the company’s possession or in relation to any necessary application under Section 127 of the Insolvency act 1986).
Finally, it should always be appreciated that the court has a broad discretion as to whether or not a winding up order should be made or not. Thus even in circumstances where a petitioner appears to have a plainly good and obvious reason why a winding up order should be made, the court can nevertheless refuse to make that order.