A winding up petition on ‘just and equitable grounds’ differs from a standard creditor’s petition. Instead of being issued by a creditor, it is brought by shareholders in the event of a dispute.
If mutual trust and confidence among shareholders breaks down, impacting the company detrimentally, shareholders can petition the court to wind up the company on these grounds.
What’s the Criteria for Just and Equitable Winding Up?
The legal basis for a just and equitable winding up petition is primarily found in Section 122(1)(g) of the Insolvency Act 1986, supplemented by relevant aspects of the Companies Act 2006.
The law permits such action when there’s a profound loss of mutual trust among the company’s primary stakeholders, essentially rendering the company’s management ineffective or impossible.
Examples of situations that may warrant such a petition include:
Deadlock in Management: When equally divided directors cannot agree on key decisions, the company’s operations are paralysed.
Serious Managerial Incompetence: When the company’s management fails to perform their duties effectively, causing harm to the company.
Abandonment of Purpose: When the company’s original purpose is no longer being pursued, rendering its continued existence pointless.
Who Can File and When?
A just and equitable winding up petition can be filed by:
Directors: Acting under a majority board resolution.
Shareholders: Any shareholder who can demonstrate that the continued operation of the company is unjust and inequitable.
Other Stakeholders: Occasionally, contingent or prospective creditors who have a significant financial interest in the company’s dissolution.
Contributors: Any person liable to contribute to the company’s assets in the event of insolvency.
Additionally, the petition can be presented by any person liable to contribute to the company’s assets in the event of it becoming insolvent.
How does the Court Rule Upon the Petition?
The court will take some different factors into account when deciding whether to make a winding up order. This includes:
How the company was run;
Whether the court believes it should intervene in the affairs of the company;
Whether there is any other viable solution;
Whether it is ‘just and equitable’ to wind the company up.
The court also evaluates whether the petitioners have utilised all other available remedies to resolve their disputes. This is crucial because the court generally prefers less drastic measures over winding up, especially if other solutions could effectively address the issues without dissolving the company.
Alternative Solutions are Generally Preferred before Winding up a Company
Before deciding to wind up the company, the court explores alternative remedies, such as:
Mediation: Facilitating discussions between disputing parties to reach an amicable resolution.
Restructuring: Altering the company’s structure to resolve conflicts.
Buyout: Suggesting that one party buys out the other’s shares at a fair valuation. This solution often preserves more value for the stakeholders than liquidation would.
Conclusion
Winding up a company on just and equitable grounds is a significant legal remedy that the court does not take lightly. It is considered a last resort when other remedies are insufficient to resolve the underlying issues.
The court’s preference for alternative solutions underscores the importance of exhausting all other avenues before seeking dissolution.
Need help?
For more information about just and equitable winding up petitions, please call our team on 0800 074 6757 or email info@companydebt.com today.
FAQs on Just and Equitable Winding Up
What happens if the court approves a just and equitable winding up petition?
If approved, the court will order the company to be wound up, appointing an official receiver or an insolvency practitioner to liquidate the company’s assets. The proceeds are then used to pay off creditors and shareholders according to their legal and contractual rights.
Can minority shareholders successfully petition for a just and equitable winding up?
Yes, minority shareholders can petition for a winding up if they can demonstrate that their rights have been significantly ignored or that there has been a manifest failure in the company’s governance to their detriment. Evidence of being excluded from management or strategic decisions is often pivotal in these cases.
How long does the process of a just and equitable winding up take?
The duration can vary significantly depending on the complexity of the case, the court’s schedule, and the extent of disputes among the company’s stakeholders. From filing to resolution, the process can take several months to over a year.
