If the relationship between a company’s directors and shareholders breaks down and cannot be salvaged, a just and equitable winding up application allows the court to make an order to wind the company up.
This is an option of last resort and should only be used when the business is unable to continue because of a serious issue, such as a dispute, a loss of trust or improper conduct.
Summary
- What is the just and equitable winding up of a company?
- When is just and equitable winding up used?
- Who can petition for just and equitable winding up?
- What do the courts consider when asked to make a winding up order?
- Alternatives the court expects you to consider before asking for a winding up order
- The ‘alternative remedy’ bar: why petitions can fail if another route is available
- Evidence and tactics when asking for just and equitable winding up
- The winding up application procedure in practice
- Outcomes and consequences of a winding up order
- Costs, funding and risks in winding up applications
- Negotiated exits
- Practical checklist
What is the Just and Equitable Winding up of a Company?
Under Section 122(1)(g) of the Insolvency Act 1986, a company may be wound up by the court if the court believes that it is just and equitable to do so. This differs from other grounds, such as financial grounds, being unable to pay its debts or failing to commence business.
A clear contrast also exists between a solvent shareholder dispute and an insolvency-driven winding-up. The former deals with the division of assets between owners who are in disagreement, while the latter requires the payment of creditors in order of preference from the available funds.
The majority of just and equitable petitions in this context concern solvent companies in dispute, rather those unable to pay their debts, which is the route set out under Section 122(1)(a)-(f) of the Insolvency Act 1986.
The option can be used by minority shareholders who might not have the ability to resolve matters in any other way. However, winding up must be a reasonable solution, and the court will not make an order if it believes that there is another option available.
When is Just and Equitable Winding Up Used?
There are five main circumstances in which the courts will consider making a winding up order:
- There is a functional deadlock
- Trust has broken down in a quasi-partnership
- A shareholder has been excluded from management
- The purpose of the company has failed
- There is a lack of probity or mismanagement
There is a Functional Deadlock
This can arise where there is a small number of shareholders, such as two or four, and there is a 50:50 split in opinion, with the two sides in complete disagreement over the way forward. Where there is no ability to compromise, and the company is no longer able to make operational decisions, so that it is unable to function, the court will consider making a winding up order on just and equitable grounds.
Trust Has Broken Down in a Quasi-Partnership
Similarly, if a company is a small one with directors who agreed to run the business together on the basis of mutual trust and confidence, much as a partnership is operated, the courts may decide that once this trust and confidence no longer exists, winding up is appropriate.
The requirements for this option are set out in the case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, and are as follows:
- The association was formed on the basis of a personal relationship involving mutual confidence, such as where a partnership was converted into a company
- There was an agreement or understanding that some or all of the shareholders would be involved in the business
- Transfer of shares in the company is restricted, so that it is not an option for a shareholder to sell
A Shareholder Has Been Excluded from Management
If a shareholder legitimately believed they would be participating in the running of the business but they are then excluded, it would be just and equitable to ask for the company to be wound up. For example, if a member of a quasi-partnership were to be pushed out, they could request a winding-up order.
The Purpose of the Company Has Failed
When the original and fundamental purpose of the business no longer exists or it is no longer possible to work towards this, the court can decide to end the company. For example, if a company was created to manage a building and that building is destroyed, then the whole purpose of the company no longer exists.
There is a Lack of Probity or Mismanagement
Where the directors or majority shareholders are dishonest, lack integrity or are involved in serious misconduct, this can satisfy the court that there is a lack of probity or mismanagement of the business. A minority shareholder applying on this ground would need to show that they had lost confidence in the directors or majority shareholders.
An example is where company funds are treated as the director’s own money, or minority shareholders do not receive a fair share of the company profits.
Who Can Petition for Just and Equitable Winding Up?
The following parties can ask the court for a winding up order on the basis that it would be just and equitable:
- The shareholders, provided:
- they have been a shareholder for at least six months out of the previous eighteen, unless they are an original shareholder; and
- they have a tangible interest in the winding up, for example, the company has enough assets so that the shareholder will be entitled to a payment on winding up
- The company, following the making of an ordinary resolution
- The company directors; a director can petition the court if the company’s articles of association give them this authority
- Creditors, although they would not usually choose this option, as they will generally be petitioning the court on the basis of the company being unable to pay its debts
- The Secretary of State for Business and Trade (acting through the Insolvency Service), where it believes that it is in the public interest for the company to be wound up
What Do the Courts Consider When Asked to Make a Winding Up Order?
The courts consider a winding up order to be a last resort and will look for evidence that there are no other realistic options available.
This includes looking at the following points:
- Whether there is an alternative option; if the court believes there is a less damaging way forward, it can make a different order
- What the relationship between the parties is, including whether a personal relationship of trust or an informal understanding has been breached
- The grounds on which the petition is made, and whether they fall under one of the core reasons for granting a winding up petition on just and equitable grounds
- Whether there is evidence that the petition is unreasonable. For example, if it is being used to pressure other parties, the court can refuse to order winding up
- The conduct and motivation of the parties, including whether the petitioner is innocent of poor behaviour
- Whether the petitioner has a realistic expectation of receiving a financial benefit from the winding up, such as a share of the funds following the sale of assets
- The impact of the order, including the effect on creditors, employees and others
Alternatives the Court Expects You to Consider Before Asking For a Winding Up Order
Because of the severity of a winding up order, the court expects the petitioner to explore other potential solutions first. These include:
- Negotiating a buy-out, with attempts to make a deal allowing one party to exit the company
- Attempting alternative dispute resolution, such as mediation, to try to resolve matters without the need for litigation
- Ensuring that all options outlined in the company’s documentation, such as the shareholders’ agreement, have been explored
- Filing an unfair prejudice petition, which could result in an order requiring one party to buy out the other at market value
- A derivative claim filed on behalf of the company, which could result in an order requiring a director to resolve issues
The ‘Alternative Remedy’ Bar: Why Petitions Can Fail if Another Route is Available
The courts will not make a winding up order where a viable alternative exists or the petitioner is acting unreasonably. This is because ending a business is considered the nuclear option and should only be used when continuing is no longer feasible.
A common alternative remedy is an unfair prejudice petition, which could result in an order that one party buy out the other, allowing the business to carry on.
Evidence and Tactics When Asking For Just and Equitable Winding Up
The court will want to see clear evidence of legitimate grounds for winding up the business before it will make a winding up order.
This could include evidence of any breakdown of trust and confidence, impropriety, misconduct or deadlock.
Paperwork showing that attempts have been made to resolve matters out of court will also be helpful, as the court will look for evidence that the petitioner has taken reasonable steps to find a solution, and not just immediately asked for the company to be wound up.
Filing an unfair prejudice petition may be advised, as this can allow the court to order one party to buy out the other. The winding up petition can be added as a secondary option, should the court consider this a preferable outcome.
The Winding Up Application Procedure in Practice
The first step is to explore alternative options to a winding up petition, so that the court can see that attempts have been made to find a solution.
If these fail, a petition is drafted setting out why a winding up order is requested. This needs to be accompanied by evidence of the grounds for the petition and any other relevant information.
The petition is filed at court, and once it has been sealed, a copy is formally served at the company’s registered office and on any other parties, such as directors or shareholders. When the petition is served at the registered office, it must be handed to a company director, another company officer or a company employee, or alternatively anyone authorised to accept legal documents on behalf of the company, such as an accountant or solicitor.
An interim order can be requested if there is a risk that assets will be moved before the petition is heard.
An initial hearing will take place to establish a timetable for the exchange of evidence, and then a final hearing scheduled at which the judge will hear the case.
Outcomes and Consequences of a Winding Up Order
If the court makes a winding up order, the company must cease trading immediately. Assets are frozen and the company must go through the liquidation process. Directors no longer have power over the company, and matters will be dealt with by an insolvency practitioner appointed by the court on behalf of the Official Receiver.
Their job is to liquidate the company’s assets, settle outstanding debts and distribute any remaining funds to the shareholders, in accordance with their holding.
Costs, Funding and Risks in Winding Up Applications
If a petition is unsuccessful, it is usual for the petitioner to be ordered to pay the other side’s reasonable costs.
Third party funding is unlikely to be available, although it may be possible to purchase After the Event insurance to cover the risk of being ordered to pay the other side’s costs.
Because of this financial and reputational exposure, many petitioners take advice from insolvency and corporate recovery solicitors before issuing a petition. Once a petition is filed, a company may be paralysed. Once the petition is advertised in the Gazette, banks will generally freeze accounts. If a winding up order is made, any disposal of assets after the date of the petition becomes void. This means that a winding up petition on just and equitable grounds is likely to be extremely disruptive.
If the petition is successful, then the insolvency practitioner will dispose of the assets. The price achieved may be minimal, and this could result in losses. The process can also result in a loss of goodwill when dealing with suppliers and creditors, making it harder to re-establish a business in the future.
Negotiated Exits
A negotiated exit is generally a far better option. The business can be preserved, and there will not be a cut-price sale of the assets. The expense and damage of litigation are avoided, and the process is much faster and more cost-effective.
Even if a deadlock exists, help from an experienced corporate solicitor or mediator can help the parties to find a way forward.
Practical Checklist
Before going ahead with a winding up petition on just and equitable grounds, it is recommended that the following points be considered:
- Is there a viable alternative?
- Has alternative dispute resolution been attempted?
- Do you have legal standing to bring the petition?
- Are there valid grounds to show that it is just and equitable to wind up the company?
- Do you have a full picture of the impact of a successful winding up petition?
- Do you have strong evidence in support of a petition?
- Have you discussed all options with an expert corporate solicitor?
Contact Our Corporate Solicitors
If you need advice, representation, or guidance in respect of a shareholder dispute or you would like to discuss the possibility of a just and equitable winding up, you can speak to one of our experienced corporate solicitors.
For more information on our services, see our corporate solicitors page.
To speak to one of our experienced corporate solicitors, ring us on 0300 303 2071, email us at info@witansolicitors.co.ukor fill in our contact form and we will talk through your situation with you and discuss how we can assist. We have offices in Birmingham, Northampton, London and Wellingborough.
