UK: A remedy of last resort: High Court orders winding up of company on just and equitable ground

Winding up has been described as a remedy of last resort and an “exceptional remedy to grant in the context of disputes between shareholders”², and it is rarely ordered. This case is a reminder, and an illustration, of the high threshold that must be reached regarding the breakdown in the relationship between the shareholders for the court to be persuaded that winding up the company is the right thing to do – but that, in an appropriate case, the court will exercise its power.

For a winding up, the court is required to consider, principally, whether there is a functional deadlock in the management of the company such that the company is paralysed and cannot operate and/or an irretrievable breakdown in trust and confidence between the shareholders – and also whether the petitioner is acting unreasonably by seeking to have the company wound up instead of pursuing some other alternative option. In this case, the court found the threshold was met and ordered the winding up. Interestingly, in relation to whether the petitioner was acting unreasonably in seeking the winding up order, although the petitioner had an offer from the respondent to buy his shares, aside from the offer being too low, the judge foresaw that this would simply be another recipe for further disagreement between the parties and concluded that it was not unreasonable for the petitioner to refuse the offer. However, in another case that came before the court two weeks later, the court refused to order the winding up on the basis that, in its opinion, the petitioner was acting unreasonably in pursuing the winding up order instead of seeking agreement to sell his share in the company to the respondent³, demonstrating that each case is fact-specific.

The judgment also demonstrates how witness evidence, both in the form of witness testimony and documentary evidence of exchanges between the parties, plays an important role in providing the judge with a measure of the parties’ characters and how entrenched they are in their respective positions – allowing the court to form a view as to their compatibility. This is essentially what led the judge to conclude that to allow the parties to enter into an agreement for the sale of the petitioner’s shares to the respondent would not be a suitable alternative to winding up the company, no doubt having come to the conclusion that their ability to reach a consensus on company matters was forever doomed based on the impression he had formed of their relationship.

Facts

Mr Dosanjh and Mr Balendran had, from around 2011, carried on a business of real estate management and development as a limited liability partnership, which owned various properties around England estimated to be worth around £6.85 million. A company, Webb Developments Limited (“the Company”), was incorporated in February 2018 and the properties were transferred to it. Mr Dosanjh and Mr Balendran were the only two shareholders in, and the only two directors of, the Company.

In 2020 the parties’ relationship began to deteriorate and, despite efforts to resolve issues between them over the years, disputes remained. In 2023, Mr Dosanjh presented a petition to the court seeking an order for the winding up of the Company on the just and equitable ground, relying on functional deadlock and the breakdown of the relationship of mutual trust and confidence between him and Mr Balendran. The case came before ICC Judge Mullen (“the Judge”).

Prior to the trial Mr Balendran proposed a phased sale of the Company’s properties with a winding up to follow on a longstop date. After the trial (but before judgment was handed down) he indicated that he would be willing to purchase Mr Dosanjh’s shares.

The applicable law

The Judge gave a summary of the applicable law.

The Insolvency Act 1986 (“the Act”) provides that a company may be wound up if the court is of the opinion that it is just and equitable do to so. (Section 122(1) of the Act).

In deciding whether it is just and equitable to grant the order, the law has developed through case law to establish that there must be either a functional deadlock between the shareholders, which is where an inability by them to co-operate in the management of the company’s affairs leads to an inability of the company to function, and/or an irretrievable breakdown in trust and confidence between them⁴.

Other considerations for the court include:

• A petition for a winding up order must show that a tangible benefit will be derived from the winding up, usually that there is a surplus of assets over liabilities so that there will be a distribution to members⁵.
• A petitioner must come to court with clean hands and, if the breakdown of the relationship is due to his/her misconduct, he/she cannot insist on the company being wound up if the other party wishes it to continue⁶.
• That said, this does not mean that a petitioner must be able to show that he/she is entirely blameless of the problems that have paralysed the company. Petitions for winding up on the just and equitable ground usually represent the culmination of a long period of argument and disruption from which it is rare for any one party to emerge as having behaved with exemplary politeness and reasonableness⁷.

The court shall not make a winding up order if some other remedy is available to the petitioner and the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. (Section 125(5) of the Act).

Ultimately, the court has a wide statutory discretion as to the orders that it may make on the hearing of a petition. It may dismiss the petition, adjourn the hearing conditionally or unconditionally, make an interim order, or make any other order that it thinks fit. (Section 125(1) of the Act).

Was it just and equitable to grant the winding up order?

Applying the relevant law to the facts, in deciding whether it was just and equitable to grant the winding up order, the judge considered whether there was a functional deadlock and/or an irretrievable breakdown of mutual trust and confidence between Mr Dosanjh and Mr Balendran.

Functional deadlock

Mr Dosanjh and Mr Balendran each drew £7,000 per month from the Company. The principal dispute between them concerned how to treat these monthly payments, and the instructions that should be given to the Company’s accountants in this regard. Mr Dosanjh alleged that it had been agreed that these were to be treated as repayments of the directors’ loans to the Company, while Mr Balendran’s case was that it had been agreed that they were to be treated as reimbursement of expenses incurred by the directors on behalf of the Company. The deadlock between them meant that the Company’s accounts could not be agreed.

On the evidence before him, the Judge was satisfied that there was no agreement between the parties that the payments would be treated as expenses. Indeed, the round-figure nature of the payments was not indicative of expenses, which would no doubt fluctuate every month. Further, no evidence of expenditure by directors that fell to be reimbursed had been provided. In his opinion, an exchange of emails between the parties in 2020 represented the assent of both directors under the Company’s Articles of Association to treat the monthly payments as repayments of loans they had made to the Company.

However, this did not resolve the deadlock between the parties. There were disagreements between them as to other aspects of the accounts. The parties were also in dispute about many other business matters (such as in relation to council liabilities relating to a property in Andover, a tenancy in relation to a property in Croydon and planning permission in relation to a property in Staines - and were also in disagreement over the Company’s corporation tax liabilities).

The parties had attempted to settle their differences. Late in 2021, they instructed accountants to report on the treatment of the monthly payments and they instructed a business advisory firm to advise on a way of resolving the deadlock by way of structured wind down of the Company. Discussions between the parties to reach an agreement continued from this point into 2023. However, the attempts to reach a resolution came to nothing.

Breakdown of mutual trust and confidence

Mr Dosanjh and Mr Balendran had agreed to sell one of the properties in the Company’s portfolio, Aldwych House. In February 2022, Mr Balendran told Mr Dosanjh that a company, H&B Services London Ltd (“H&B”) was interested in purchasing Aldwych House for £830,000. When Mr Dosanjh asked for details about the buyer, Mr Balendran revealed that he was a 50% shareholder in, and a director of, H&B. Mr Dosanjh was not happy that Mr Balendran had not been open about this from the outset, but nevertheless agreed to the sale.

However, it further transpired that Mr Balendran had instructed architects to draw up plans for the conversion of Aldwych House into flats, and was seeking planning permission (which was ultimately obtained). Mr Dosanjh was not aware of this until later in 2022, as the sale was progressing. A valuation report suggested that planning permission would increase the property’s value by £80,000. On learning about Mr Balendran’s plans, Mr Dosanjh decided not to go through with the sale. Contracts had not been exchanged at this point.

In the view of the Judge, Mr Balendran had placed himself in a position whereby his interests in H&B conflicted with his duties to the Company. He said that he could entirely understand why Mr Dosanjh would have been reluctant to proceed with a transaction in which his fellow director had a personal interest and about which he had not been transparent – and that it was clear that Mr Balendran’s conduct in respect of the sale of Aldwych House would have been fatal to any remaining relationship of trust and confidence between the parties.

Was Mr Dosanjh acting unreasonably in seeking to have the Company wound up instead of pursuing some other available remedy?

The only remaining question was whether Mr Dosanjh was unreasonable in seeking winding up of the Company rather than some other remedy. The Judge said that he was not. Mr Dosanjh did not wish to buy Mr Balendran’s shares, so that was not an option. Mr Balendran had made an unrealistically low offer to purchase Mr Dosanjh’s shares which Mr Dosanjh could not be criticised for rejecting. In any event, the purchase of Mr Dosanjh’s shares depended on Mr Balendran obtaining a bridging loan which was subject to a valuation of the Company’s properties – and the Judge foresaw this as being a recipe for further dispute between the parties, not least as to the basis on which the properties should be valued. The Judge concluded that, in his view, there was no realistic alternative to winding up.

The Judge added that he did not see any reason to suppose that Mr Dosanjh was seeking to use the petition for an improper purpose. Although Mr Balendran had alleged this in his defence, it was not backed up by evidence. Ultimately, the breakdown in the parties’ relationship and the deadlock between them was such that it was entirely unsurprising that Mr Dosanjh resorted to petitioning for the winding up of the Company.

Conclusion

The Judge said that it was plain that there was an irretrievable breakdown in the relationship of trust and confidence between the parties, and that the Company was functionally deadlocked as the parties were unable to reach agreement on the conduct of the Company’s affairs.

The Judge recognised that a compulsory winding up may yield a lower return on the sale of the properties than would be obtained on a sale by the directors, but nonetheless, he remained of the view that there was no alternative option. The Judge therefore granted an order that the Company be wound up by the court.

If you have any questions about this article, or any of the issues raised, please get in touch with one of the contacts listed, or your usual contact at Hogan Lovells.

Authored by Daniela Vella and Alex Sciannaca.