Just and equitable petitions—deadlock in small family business

Just and equitable petitions—deadlock in small family business

What can we learn from a recent High Court decision where the court made a winding-up order on just and equitable grounds over a family-run company?

In the case of Re Brand & Harding Ltd  [2014] EWHC 247 (Ch), [2014] All ER (D) 136 (Feb), Mrs Justice Rose wound up a company on just and equitable grounds, pursuant to section 122(1)(g) of the Insolvency Act 1986 (IA 1986), where there had been a breakdown in mutual trust and confidence, which impeded the management of the company between its shareholders, two sisters.

What happened in the case?

The company subject to the petition was owned by sisters (the shareholders). The company ran a 242 acre farm. The petition was issued on the basis that the shareholders had reached a deadlock in that they contended that they could not agree on the management of the company. In addition there had been cross-accusations of misconduct, which had led to bitter acrimony and they could not agree on any matter relating to the future governance of the company. Therefore a winding-up petition was issued by the shareholders seeking an order to wind-up the company, pursuant to IA 1986, s 122(1)(g) on the grounds that it was just and equitable that the company be wound up.

What did the court say?

The court granted the order to wind-up the company on just and equitable grounds.

In considering whether or not it was appropriate to make the winding-up order, the court decided that the fact the company was a small/private company was not enough in itself to satisfy the legal test for winding-up on just and equitable grounds. There had to be something more for the court to make the order. Such factors might include:

  • an association, or partnership, formed or continued and based upon a personal relationship, which involves mutual confidence
  • an understanding that some or all of the shareholders had to participate in the conduct of the business
  • a restriction on the transfer of the shareholders' interest in the company

When looking at whether any of these sort of factors applied, the court addressed the following matters in respect of the company:

  • whether it was intended to run the company as a quasi-partnership and whether it was run as such
  • whether the court should intervene with the affairs of the company, in particular where the management of the company had been impended by a deadlock and the mutual trust had broken down, causing the company to be improperly managed
  • whether there was any other remedy or solution
  • whether it was just and equitable to wind the company up

The court found it was clear that the company had been intended to be run as a quasi-partnership—it was in deadlock and was likely to remain so. There had been a clear breakdown in mutual trust and confidence, and this was detrimental to the management and running of the business. As there was no other alternative remedy, the court wound the company up.

What does this case tell us?

Given the provisions in section 994 of the Companies Act 2006, these type of petitions are quite rare. The case clearly sets out the matters the court will expect to see and take into account when granting an order to wind-up a company on just and equitable grounds. As the case points out, there needs to be more than just a small and privately owned company. There needs to be additional factors (such as deadlock, or a breakdown in mutual trust and confidence) and no alternative remedy.

Benn Richards, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Further Reading

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When a winding-up petition can be issued and a company wound up by the court

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First published on LexisPSL Restructuring and Insolvency

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