A ‘Just and Equitable’ Petition in the Winding-Up Court

Pawel Guzik

LLM BVS Student & CO.IN Volunteer 2020/21 at City Law School

“Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless by entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company” – Smith J in Re Wondoflex Textiles Ltd [1951] VLR 458, 467, cited with approval by Lord Wilberforce in Re Westbourne Galleries [1973] AC 360, 378.

On 2December 2020, while volunteering for the Company Insolvency (“CO.IN”) Pro Bono Scheme alongside Joshua Hitchens, a barrister at 4-5 Gray’s Inn Square, I attended the winding-up court during which one petition in particular attracted my attention. Unusually, even to the ICC Judge’s surprise, a ‘just and equitable’ petition was listed on the ordinary list, turning what was supposed to be a brief and fast-moving process into a case management conference lasting almost thirty minutes. An army of senior barristers, topped off with a QC, discussed the draft order in detail and agreed on the action plan running well into 2021. I found it especially interesting seeing that I covered case management conferences in my Civil Litigation class in the same week, showing me how well CO.IN complements my BVS studies. Having been intrigued by this unusual winding-up ground, I decided to produce a short note about it which will hopefully assist litigants in person and CO.IN volunteers who encounter it in the future.

A company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up (s. 122(1)(g) of the Insolvency Act 1986 (‘the 1986 Act’)). In line with [1-51] of Fitzgerald and Caulfield’s Shareholders’ Agreements (8^th edition), the bases on which a ‘just and equitable’ petition can be founded “include:

1. where the shareholders have fallen out and there is deadlock between two equally divided groups of shareholders, such that the business can no longer be effectively carried on;
2. where the claimant is owed some special obligation by the other shareholders and this is breached (the obligation must be something more than the general rights of a shareholder);
3. where the company is unable to carry on the business for which it was incorporated; and
4. where the company was formed for some illegal or fraudulent purpose.”

The petitioners should provide evidence of them being worse off as a result of the company’s actions they complained about in their petition (Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644 [37] (McCombe LJ)). The court will also take into account the interests of other members and creditors of the company (Fulham Football Club (1987) v Richards [2012] Ch 333 [46] (Patten LJ)). If the court is of opinion that the petitioners are entitled to relief either by winding-up the company or by some other means, and that in the absence of any other remedy it would be just and equitable that the company should be wound up, the court shall make a winding-up order. However, the court shall not make a winding-up order if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy (s. 125(2) of the 1986 Act). Other remedies most commonly include ‘unfair prejudice’ orders under s. 994 of the Companies Act 2006 and offers to buy the petitioners’ independently valued shares.

For CO.IN purposes, procedural aspects of ‘just and equitable’ petitions are especially significant. They are governed by rr. 7.25-7.36 of the Insolvency (England and Wales) Rules 2016 (SI 2016/1084) and CPR PD 49B. Most importantly, parties should be mindful of s. 127(1) of the 1986 Act, which provides that any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is void, unless the court otherwise orders. The court will generally validate all dispositions made in the ordinary course of business (Re Burton & Deakin Ltd [1977] 1 WLR 390, 397 (Slade J)) unless the petitioners manage to successfully object to them by proving that e.g. the company is not trading profitably (Re Company (No.007523 of 1986) [1987] BCLC 200 (Mervyn Davies J)). More specifically, as explained by Henderson J in Re Fortuna Development Corp [2004-5] CILR 533, there are four requirements which an applicant needs to satisfy to be entitled to a validation order when the company is solvent:

1. the proposed disposition must appear to be within the powers of the directors;
2. the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company;
3. it must appear that in reaching the decision to make the disposition the directors have acted in good faith (the burden of establishing bad faith being on the party opposing the application); and
4. the reasons for the disposition must be shown to be ones which an intelligent and honest director could reasonably hold.

The above neatly summarises the main issues arising in connection with ‘just and equitable’ winding-up petitions. Should any litigants in person require free advice or help in relation to such or other petitions, they should not hesitate to contact us at CO.IN. We will do our best to assist.