A deadlock situation between shareholders who own 50 per cent each of a company can result in the demise of a profitable business, a situation no one, including the Courts, wants. But sometimes, liquidation is the only way forward. Suppose you are currently experiencing a 50/50 shareholder deadlock or believe there is a risk of one occurring, or the relationship between you and the other shareholder has irretrievably broken down. In that case, it is crucial to get the advice and support of an experienced Company Law Solicitor.
What is Meant by 'Liquidation'?
Liquidating a company means closing it down and using its assets to pay off any debts. Any leftover funds will go to the shareholders. The company will also be removed from the Register.
There are three types of liquidation, namely:
- Creditors' Voluntary Liquidation: Your company cannot pay its debts and you involve your creditors when you liquidate it
- Compulsory Liquidation: Your company cannot pay its debts and you apply to the Court to liquidate it
- Members' Voluntary Liquidation: Your company can pay its debts but you want to close it
- Winding Up the Company on Just and Equitable Grounds: Your company can pay its debts, but you want to close it and you apply to the Court to liquidate it
In a deadlock situation, or where one 50 per cent shareholder wants to leave the company and their shares cannot be sold and the other shareholder cannot afford to buy them out, a Members' Voluntary Liquidation may be sought.
How Does a Member’s Voluntary Liquidation Happen?
To trigger a Member’s Voluntary Liquidation, a Special Resolution for the company's winding up must be passed within five weeks of a statutory declaration of solvency being made.
Under the Insolvency Act 1986, section 91(1), at the general meeting to pass the Special Resolution, the shareholders must also appoint an Insolvency Practitioner to manage the liquidation.
The sticking point for triggering a Members' Voluntary Liquidation for the Special Resolution to pass is that there must be a 75 per cent majority vote. If you and your business partner are 50/50 shareholders and one of you does not want a Members' Voluntary Liquidation, then you are back to deadlock.
You could work with your legal advisor and try to negotiate a deal to bring about a Member’s Voluntary Liquidation. If this proves unsuccessful Winding Up the company on just and equitable grounds may be your only option.
How Do I Apply to Wind Up a Company on Just and Equitable Grounds?
Under section 122(1)(g) of the Insolvency Act 1986, a company member or company members can petition the Court for the Compulsory Winding Up of the company on just and equitable grounds. Common reasons for applying to the Court for this type of liquidation include:
- Loss of substratum
- Deadlock
- Justifiable loss of confidence due to mismanagement
- Irretrievable breakdown in trust and confidence at a quasi-partnership company
- Exclusion from the management of a quasi-partnership company
The above list is not exhaustive, and the Court's discretion concerning available remedies is extensive.
The Compulsory Winding Up of a company on just and equitable grounds is a remedy of last resort. As mentioned above, the Courts are loathed to wind up a profitable, healthy business.
Does a Quasi-Partnership Have to Exist?
If the issue is one of deadlock a quasi partnership is not required. A quasi-partnership is needed to wind up the company on just and equitable grounds due to a loss of trust and confidence.
Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] A.C. 360 stated that the following elements are typically present in a quasi-partnership:
- An association formed or continued based on a personal relationship involving mutual confidence
- An agreement or understanding that some or all shareholders will be entitled to participate in the conduct of the business
- Restrictions upon the transfer of shareholders' interests in the company prevent a shareholder from leaving when confidence is lost
Instances of unfairly prejudicial conduct under section 994 of the Companies Act 2006 may also constitute just and equitable grounds for winding up; however, it would be rare for the Court to use this remedy in such a situation.
Wrapping Up
Liquidating a solvent company is an enormous step to take and should never be done without taking legal advice from an experienced Company Law Solicitor. Not only can they help you understand the legal complexities of liquidating your company, but they can alert you to business considerations such as whether your brand can survive a closing down and relaunching of the company and whether there are risks of unfair dismissal or unfair prejudice claims.
How We Can Help
As experts in shareholder law, Witan Solicitors can provide expert advice and representation on all company law matters, including removing shareholders and drafting Articles of Association and Shareholder Agreements. Contact us on 0330 173 6983 or send us an email for more information.
