In a recent decision of the High Court, His Honour Judge Keyser KC determined that a petitioner was acting unreasonably in pursuing a winding-up order instead of seeking agreement to sell his shares in the company to the respondent shareholder, commenting that the 'attitude displayed by the Petitioner… showed a willingness to cut off his nose to spite his face.'
The court has the power to order that a company be wound up and its assets sold if it is convinced that it is just an equitable to do so – typically this may be where there are equal shareholders who cannot agree how to proceed or the relationship between them has entirely broken down. However, as this judgment demonstrates, the court will not be quick to wind up a company which is trading successfully and will examine all of the circumstances including what other options are available to the business owners.
In this article we provide a background to the case, reveal why the ‘just and equitable’ winding up petition failed, and highlight the key takeaways for owner-managed businesses.
As you might expect, following an alleged assault and suggestions of breaches of fiduciary duties, the relationship between the petitioner and the respondent, being the only shareholders and directors in the company, broke down. Mediation followed, during which the petitioner offered to purchase the respondent’s shares. The respondent responded in kind and an agreement for the respondent to purchase the petitioner’s shares was reached in principle at least. The respondent then resiled from his original position.
Two and a half years after the mediation, the business continued to operate with both parties playing a part in its running, alongside which the parties respectively made offers to buy one another’s shares, but neither party would sell up.
Subsequently, by reason of breakdown of relationship and that the company’s affairs were said to be deadlocked, the petitioner sought a winding up order on the ‘just and equitable’ ground s122(1)(g) of the Insolvency Act 1986. The petitioner alleged the respondent had excluded him from management and should not '…benefit from being the sole owner of the business as a result of his assault.'
The respondent recognised the breakdown of their personal relationship, but denied that company was deadlocked and that they were unable to cooperatively run the business. It was therefore for the judge to decide whether it would be just and equitable to grant the petition.
The judge’s decision considered the below:
1. A true functional deadlock
The petitioner had characterised his position as being ‘locked into the company’ unless the respondent would sell his shares to the petitioner. The judge disagreed finding there to be no functional deadlock. The allegation that the petitioner had been excluded from the business was unsupported by evidence, and the judge considered that commercial disagreements, e.g. about menu item prices, did not justify invoking the concept of a 'functional deadlock'. The judge maintained that in a 'two-man restaurant business, the continued ability to trade is some indication that there is no deadlock'.
2. Breakdown in trust and confidence
However, the judge recognised 'an irretrievable breakdown in trust and confidence between the Petitioner and the Respondent', and that both parties had contributed to this. Therefore, a winding-up order could be made, but it was for the judge to decide whether it was just and equitable to do so.
3. Was a winding up order the appropriate remedy?
Whilst the judge was satisfied that the petitioner was entitled to some relief, winding up was not appropriate for two reasons.
Firstly - some other remedy was available to the petitioner; the 'other remedy' being the sale of his shares to the respondent.
Secondly - the petitioner had acted unreasonably in seeking a wind up order instead of pursuing the other remedy. As the petitioner maintained that he was not acting unreasonably, the judge examined the petitioner’s reasons for seeking the order and refusal of sale to the respondent, and his aims. The judge found the true motive was that the petitioner did not want the respondent benefitting from his own alleged wrongdoing, as expressed in evidence and upon reflection of the development of the petitioner’s position in terms of an initial willingness to sell, moving to a firm position not to sell and being '…plainly angered by the Respondent's decision to resile from the [original] agreement reached.'
On the basis that the petitioner refused to sell to the respondent due to a 'personal animus', the judge did not consider the petitioner was acting reasonably in seeking a winging up petition instead of the other remedy, and therefore it was not just and equitable to wind the company up.
A 'functional deadlock' provides a situation for just and equitable winding up, however it requires an 'inability of the Company to function at shareholder level', and this decision is a indicator that if a business continues to trade, despite having commercial disagreements of a normal business nature, it’s within the court’s gift to find that there is no functional deadlock. This will always turn on the evidence that is before the court to establish whether such a deadlock exists.
Secondly, although the breakdown of a relationship of trust and confidence provides a situation for just and equitable winding up, it may still fail if there were alternative remedies available to the petitioner.
This judgment demonstrates the importance of proper legal analysis of the factors a judge will consider particular as regards to whether or not there was an alternative remedy available, which will inform the court’s view as to whether the petitioner acted unreasonably in seeking a winding up order instead of pursuing the other available remedy.
For further information and advice, please contact our commercial litigation team.
