Regulations about Just and Equitable Winding-Up Remedy while Starting a Company UK

05 Oct

Section 994 of Companies Act 2006 provides protection to shareholders. By unfair prejudice it means that the harm is caused to the interests of members and shareholders by the unfair conduct of company. According to Section 1994, member can file a petition in court if company’s conduct is against the interests of him or other members and is causing prejudice against members. The rules and regulations about shareholder’s protection should be abide by while considering how to open a company in UK. There are different remedies which are adopted by court while dealing with the matter of unfair prejudice. These remedies should be clearly understood by a directors, members and other higher management, along with regulations relevant to Business registration UK. These include unfair prejudice remedy, oppression remedy and just and equitable winding up remedy. In this article, we will discuss about just and equitable winding up remedy that will help us in further elaborating answer of how to open a company in UK, other than just describing Business registration UK process. According to Kershaw, introduction of unfair prejudice remedy and innovations in statute have aided a lot in the protection of rights of shareholders and is considered as the important step regarding shareholders protection in English Company Law. Jenkins Committee view regarding unfair prejudice remedy is that, recommendations led to unfair prejudice remedy. Cohen Committee gave the idea of Oppression remedy according to which court has power to impose just and equitable settlement on the company’s activities which are oppressive to shareholders but this remedy has technical and substantive limitations. According to Jenkins Committee, this remedy is not effective and in cases where acts fall short of illegality this remedy must extend. Ottley or ZCT gave a summary of the actions which can be adopted by shareholders in case of unfair conduct of company. This set of actions can be called as PERDURES.

P stands for Peskin where shareholders can sue directors directly in case Paskin v Anderson relation exists.

E stands for Enforce subjected to qua member rights in Hickman v Kent and the internal irregularity rule in MacDougall v Gardiner

R stands for Removal of directors.

D stands for Derivative action in case of breach of duty.

U stands for unfair prejudice action in which member can act in case of unfair prejudice.

R stands for reserve power however article 4 of model articles requires SR though.

E stands for Equitable winding up in case money is owed according to Section 122 (g).

S stands for Sell his shares. To find a market for minority shareholding it is unlikely for him but he finds a one the sale price can represent a loss.


Equitable and Just Winding-up Remedy

After starting a company UK, court under this remedy can order winding up of a company if it considers it just and equitable. According to Section 122(1)(g) of Insolvency Act 1986, court can wind up the company if it feels that it is just and equitable. According to Kershaw, an example of the condition where court can order to wind up the company is a deadlock condition when the deadlock occurs between the shareholders which hold 50% of shares each. In view of Reisberg, consideration of just and equitable winding of a company as remedy is important for consideration of unfair prejudice remedy for two reasons under Section 122(1)(g) of IA 1986.

First reason is that, under Section 994, Section 122(1)(g) is commonly treated as an alternative to unfair prejudice remedy.  Firstly, it is not necessary for the facts to satisfy the test under Section 122(1)(g) if they do satisfy the tests under Section 459 and vice versa and secondly, under Section 459-461, winding up is not considered as remedy. Thirdly, it builds pressure on company. Due to the above reasons court has more flexibility in treating the two in an alternative way while dealing with the case.  If we see the history, then we can see that treating Section 459 and winding up remedy in alternate positions give petitioner more power to build maximum pressure on respondents for settlement of case quickly.

Second reason is that the principles which are developed by court regarding meaning of just and equitable are used in the consideration of unfair prejudice remedy requirements to some extent

Pettet view of just and equitable winding is that this remedy is unsatisfactory because the left-over assets may be very less on winding up to be distributable to shareholders. Therefore, Section 125(2) IA does not allow court to order winding up if there is some other winding available and in view of Ottley, the just and equitable winding is a drastic remedy and the priority should be given to Section 994. The situations illustrating the just and equitable winding remedy are given below:


Quasi-Partnership and Exclusion from Management

In Ebrahimi case, the carpet business was set up by a petitioner say C and Mr Nazar in partnership. To take over the business later, the company Westbourne Galleries (D) was formed. At the time when company was formed, petitioner and Mr. Nazar both transferred 100 shares to Mr. Nazar’s son George and petitioner, Mr. Nazar and George became owners of 40%, 40% and 20% shares respectively. The directors were paid from the profits earned by the company. In case of dispute, in a general meeting, Mr. Nazar and George voted to remove C from the designation of director. On this, petition was filed by the C in the court for winding up the company on just and equitable basis. Because the business was started on a partnership so the question arose that whether the court has authority to order winding up of the company on the basis of just and equity when there is partnership between the persons and whether it is just and equitable for court to order dissolution of partnership. It was decided that the court cannot order the winding up of company on the basis of justness and equity if according to articles, the majority in general meeting decides to remove a director and refrain him from participating in company business and management issues except there is an evidence that the majority did this for its own benefit neglecting company’s interest.

Lord Wilberforce described the terms just and equitable as these words illustrate that a company has more value than being a legal entity with its own personality in law and company law states that there are individuals behind and among the company which have rights and obligations and which are not submerged in company structure necessarily. On the basis of just and equitable provision, neither any party can disregard the obligations which he should obey while entering the company nor court can make him to disregard them.  However, court has authority to exercise this provision if the particular person works in an unjust and inequitable way.

Lord Wilberforce also gave examples about quasi partnership. It is not possible for a small or a private company to do business alone so these form associations or partnerships for gaining commercial benefit about which rules are written in articles. To impose the equity condition in partnerships, following elements should be considered.

The association which involves mutual confidence or personal relationship. This element is found where partnership has been converted into a private company.

The agreement according to which there will be a participation from all shareholders in business conduct.

The situation when the member is removed from a company. In this situation, member cannot transfer his interests and cannot claim his stake.

The question always arises that whether a person can a person can use his legal right to cause a prejudice against another member on equitable basis. There are also provisions available for retirement of director by rotation along with provision for removal of director so there can be an opposition and defeat from majority towards their re-election and this can be done even by casting of votes. Any member or director can find himself to be in a situation where he is removed or is non-re-electable in all these ways described above except he proves fraudulents and malafides in a company.  If a member or director proves the good faith and confidence of his fellow member or director than he can be assisted from provision of justness and equity in a way that he will be allowed to participate in company management as long the company runs.

If we see the above discussion in the present case of Ebrahimi than it is clear that there exists a clause for just and equitable winding up of a company. The person who made an appeal had a share in management and after a long partnership association joined the company formation. It can be inferred that the appellant and Mr. Nazar did this on the basis of keeping association on good faith and personal relation remains same and thing was supported by the fact that Mr. Nazar disregarded the appellant as his partner and rejected the relationship between them and C lost all his rights of shares in the profits through director renumeration and had only chance of receiving dividends.

Lord Wilberforce also described the term bonafide. It was suggested that Mr. Nazar did this bonafide in company’s interest. The phrase bonafide in the company’s interest is relevant in many contexts of company law and according to Lord Wilberforce, several decisions are taken by majority or directors which according to court has the same basis as described above. While, on the other hand, sometimes to remove a director merits of the case are also considered and also there is a more meaning than the phrase ‘in the interests of the company’. Mr. Nazar did this because according to him the company can conduct business in a better way without C and if C thinks same about Mr. Nazar than what seems is a majority view. To restrain the just and equity clause to only prove malafides would be similar to be negative towards the generalness of the words just and equity. This is because in view of Lord Wilberforce, it is not obligatory for him to differ from the court of appeal.

In view of Kershaw, this case illustrates that in a partnership, the shareholder’s ability to use power in a general meeting is limited by equitable considerations which constrained them. This is done to ensure the understanding and informal obligations between partners regarding business matters.

In view of Reisberg, the just and equitable winding is a last remedy according to Section 125(2) IA, according to him, the petitioner is acting unreasonable if it is not seeking just and equitable winding of a company as a remedy and is not considering other remedies.


Complete Management Confidence Loss

In the case of John Blackwood, there was a public company registered in Barbados under company act 1910. The company was doing testator’s business and it was entitled to divide company’s profits among family members. The managing director of a company had prepondering voting power. It was found on the petition filing by the shareholders which are not directors that directors did not hold general meetings, did not submit accounts, they recommended a dividend and they laid their position open towards the suspicion that their purpose of their omission of all these things was to keep petitioner ignorant of company’s position and also to acquire his shares at a lower price. It was decided that court allowed to give a winding up order.

Lord Shaw view regarding the situation is that there should be lack of confidence and management in company’s affairs and conduct for order of winding up on just and equitable basis to be applicable and this confidence lacking should be based on director’s conduct in the context of business and should not be based on private life and affairs of director and also it should not be spring from domestic policy of company i.e., from dissatisfaction of being outvoted. It is according to law to wind up the company if the lack of confidence is rested on lack of probity in company’s matters.

Deadlock within a Company

In Re Yenidje case, the two persons W and R who were manufacturers of tobacco and cigarettes decided to merge their businesses and formed a private company for this purpose. In this company directors and they were only shareholders and the company’s constitution was in a way that W and R has equal voting rights under the articles and the quorum requirement was of one director. In case of any dispute the matter will be referred to arbitration in case of director’s resolution is not passed. The award for entering in minute book will be on the basis of resolution passing. Until June 1915, their company successfully conducted business and in June 1915 there was dispute between the parties. The difference was referred to arbitration which after a hearing having cost exceeding 10001, resulted in an award on which there was an objection by R. R alleged W for fraud by misinterpretation and neither of R and W spoke to each other and the secretary of the company used to do communication between the two parties. The company continued to conduct business and earned profits successfully. W filed a petition that the deadlock has accoutred and under Section 129 of company’s act winding up of company should be ordered. It was decided that the company should be wind up because there was a complete deadlock. If there had been a case of partnership than there would have a dissolution and same principles would have been applied as in case of partnership in a private company apply. In this case there was a deadlock of company in comparison with Baron case, in which there was a deadlock of board.

In this article, we have seen the just and equitable winding up of company remedy in context of unfair prejudice and it is important for persons thinking about how to set up a business in UK to clearly understand this remedy in addition to other important aspects of a business.

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