Shareholder disputes: just and equitable winding up - a remedy of last resort in shareholder disputes

Shareholder disputes can often be complex and emotionally charged, particularly in small or family-owned companies where personal relationships and business interests are deeply intertwined. When such disputes reach an impasse, the law provides several mechanisms for resolution. In particular, disgruntled shareholders have the ability to bring statutory based claims against the company. A recent case from the Scottish Courts explored the remedy of winding up a company on just and equitable grounds, in the context of a shareholder dispute.

Background

Christopher Turnbull, a minority shareholder and former employee and director of Against the Head Limited (the "Company"), brought a petition to the Court of Session seeking to wind up the Company in terms of Section 122(1)(g) of the Insolvency Act 1986 (the "1986 Act"). Section 122(1)(g) of the 1986 Act provides that a company may be wound up if “the court is of the opinion that it is just and equitable that the company should be wound up”. The petition was opposed by the Company, and its directors.

It was common ground that the Company was balance sheet insolvent. Its liabilities were greater than its assets. There was also no dispute as to Mr Turnbull's title to bring the application. Just and equitable winding up petitions can be presented by a company itself, or its directors, contributories, or creditors. In accordance with Section 124(2)(b) of the 1986 Act, Mr Turnbull had been a holder of shares in the Company for at least 6 months during the 18 months before commencement of the petition, which gave him title.

There were issues, however.

Firstly, there was an issue as to whether Mr Turnbull would derive any tangible benefit if the petition was granted (in circumstances where he conceded that, if the Company was wound up, there would be no return to shareholders). There was also an issue as to whether Mr Turnbull had made out a case which would entitle the court to be satisfied that it was just and equitable for the Company to be wound up.

Decision

In the decision of the Outer House, Lord Braid stated that, as a general rule, a shareholder seeking to wind up a company on just and equitable grounds must be able to establish that the company is solvent, and that once the costs of the liquidation and creditors are paid, there will be a surplus remaining to distribute amongst shareholders. The Company's insolvency ultimately presented a formidable obstacle to Mr Turnbull's case, and one which he could not overcome. He was unable to demonstrate that the winding up of the Company would result in a tangible benefit to him in his capacity as shareholder – given that shareholders will only receive a reversion in an insolvency scenario when all debts and costs are paid.

For the above reason alone, his petition was refused. However, for completeness, and in the event that Lord Braid was incorrect in relation to the tangible benefit point, he helpfully went on to consider the other arguments and the law in relation to the "just and equitable" ground.

Grounds for a just and equitable winding up

Lord Braid said the starting point was to recognise that the discretion conferred upon the court by Section 122(1)(g) of the 1986 Act was wide. Traditionally there are three well recognised grounds on which a just and equitable order may be granted, being:

- Loss of substratum (where a company has been formed to pursue a particular object or to carry on a business of a particular type, which it has abandoned to pursue an entirely different business)

- An irretrievable breakdown in trust and confidence (where the company is a corporate quasi-partnership)

- Deadlock

But, it was said that these grounds are not exhaustive and, consistent with the broad discretion which the courts have, the remedy may be granted in any situation where it is just and equitable to do so. By way of illustration, a further example was provided where directors have acted with a lack of probity in the conduct of a company's affairs. It was said that the focus had to be on the company's affairs, and that loss of confidence must arise from the way in which directors are conducting a company's affairs insofar as it affects the applicant's relations with the company. For example, conduct consisting of a failure to hold general meetings, submit accounts, declare a dividend, or keep a separate bank account in the company's name. So called "domestic squabbles" between shareholders, would not be sufficient.

A remedy of last resort

Lord Braid also highlighted that Section 122(1)(g) of the 1986 Act is a remedy of last resort, and requires the court to carry out a three-stage analysis, asking:

- Is the petitioner entitled to some relief?

- If so, would the winding up be just and equitable if there was no other remedy available?

- If so, has the petitioner unreasonably failed to pursue some other remedy available instead of seeking winding up?

It is important that shareholders are aware of the analysis that the court will undertake, and, crucially, that a just and equitable winding up in relation to a shareholder dispute represents the 'nuclear' remedy, which will bring about the end of the company, and its ultimate dissolution.

Unfair prejudice

As a just and equitable winding up represents a remedy of last resort, shareholders should be mindful of, and consider, alternative courses of action, where they have a dispute. If they consider that company affairs are being conducted in a manner that is unfairly prejudicial to their interests, then it is important to note that they have the ability to seek relief through an alternative statutory based remedy, namely, an unfair prejudice claim under Section 994 of the Companies Act 2006 (the "2006 Act"). Actions under section 994 of the 2006 Act provide the court with a wide discretion to make any order it thinks fit to resolve shareholder disputes. This can be particularly useful when a company remains viable, but the relationship between shareholders has soured.

Choosing the appropriate remedy

The remedy to wind up a company on just and equitable grounds can serve as a vital tool in certain corporate settings. The decision of Lord Braid in Turnbull, Petitioner therefore provides a helpful reminder of how Scottish courts will approach such actions. However, while offering a way to resolve disputes when there is no hope of reconciliation, the consequences of a just and equitable winding up of a company are significant, and it represents a remedy of last resort. It is therefore crucial for shareholders who find themselves in dispute to firstly consider what remedies are available.

Corporate disputes and shareholder disputes can be extremely complex. In our experience, whilst such disputes can be quite polarising, parties do want certainty for them and for the business and as such will be prepared to consider a range of options to resolve the dispute which has arisen. This may include an unfair prejudice action under Section 994 of the 2006 Act, which can be brought in a wider range of circumstances, or it could equally be mediation or independent expert determination. If a satisfactory resolution cannot be achieved, then a just and equitable winding up may offer the finality required to resolve matters. Given the complexities of these disputes, legal advice should therefore be sought to carefully evaluate the options available and to ensure that the appropriate course of action is pursued.

Our Corporate Disputes Team at Brodies are on hand to provide the specialist advice required to resolve these types of disputes.