Protection of members interests against unfair prejudice
Case law has established a number of situations which prima facie amount to unfairly
prejudicial conduct and it should be emphasised that conduct may be perfectly lawful but still unfairly prejudicial. Thus the following have all been found to be unfairly prejudicial:
Exclusion and removal from the board, where the company was one in which the
director had a legitimate expectation of being involved in management i.e. a quasi- partnership company: In Re Bird Precision Bellows Ltd (1986) a minority shareholder with 26% of the shares suspected that the managing director of 'this quasi-partnership' company was concealing bribes that he had received in order to secure contracts. When the Department of Trade & Industry refused to investigate the minority
shareholder was removed from the board. The minority shareholder claimed that this amounted to unfairly prejudicial conduct. His claim was upheld.
The majority shareholder and director using the assets of the company for his own
personal benefit. In Re Elgindata (No.1) (1991) the majority shareholder and director used the assets of the company for his own personal benefit. The petitioner complained that this was unfairly prejudicial to him and the court granted an order under Section 461 of the Companies Act 1985 in accordance with which the respondents were ordered to purchase the shares held by the petitioner.
A policy of making low dividend payments. In Re Sam Weller & Sons Ltd. (1990) the petitioners, who between them held 42.5% of the shares in their family business, complained that the company had not increased its dividend for 37 years, despite its profitability. In 1985 its net profit had been £36,000 yet only £2,520 was paid out in dividends. The company was controlled by the petitioners' uncle, Sam Weller, who along with his sons continued to receive directors' fees and remuneration. Peter Gibson J. commented on the petitioners' position: "As their only income from the company is by
way of dividend, their interests may not only be prejudiced by the policy of low dividend payments, but unfairly prejudiced."
It should be noted that the courts may also take the petitioner's conduct into account when deciding whether certain actions are unfairly prejudicial as demonstrated by the case of Re R A Noble & Sons Ltd (1983) the minority shareholder had provided the capital but had left the management of the company in the hands of the other director, on the understanding that he would be consulted in relation to major policy matters. However, he was not so consulted by the other director and confined himself to enquiries of the activities other director on social occasions and accepted assurances that all was well. His petition, under Section 459 of the Companies Act 1985 followed on from a breakdown in the relationship between the two directors. It was held that the minority shareholder's exclusion from the company's
management was largely the result of his own lack of interest. Consequently, his petition was dismissed.
In the event that a Section 459 petition is successful, the court may in accordance with Section 461 of the Companies Act 1985, make such order that it deems fit for giving relief in respect of the matters complained of, including:
Regulating the future conduct of the company's affairs e.g. that a controlling shareholder
should conform with all the decisions that are taking during the course of board meetings
Requiring the company to do an act that it has omitted to do or to refrain from doing an
act so complained of
Providing for the purchase of the shares of the minority shareholder at a fair value by
other members o by the company itself – the usual remedy
Requiring the company not to make any specified alteration/amendment to its articles of
association without leave of the court.
Applications by minority shareholders to have a company wound-up on just and equitable grounds
The court has enormous discretion when considering whether it would be 'just and equitable' to compulsorily wind-up a company under Section 122(1)(g) of the Insolvency Act 1986. Court orders on this ground have been granted, amongst other things:
Where breakdown of mutual trust & confidence has occurred, especially in the case of a
quasi-partnership: Ebrahimi v. Westbourne Galleries Ltd (1972) where Mr Ebrahimi and Mr Nazar had carried on business in partnership dealing in Persian and other carpets. They shared equally in management & profits. In 1958 they formed a private company carrying on the same business and were appointed, as its first directors. Shortly after the company's incorporation, Mr Nazar's son, George, became a director. Mr Nazar and his son between them held the majority of the votes exercisable at General Meetings. The company made good profits, which were all, distributed as director's remuneration; no dividends were ever paid. In 1969, Mr Ebrahimi was
removed from his office as a director by a resolution at a General Meeting under what is now known as Section 303 of the Companies Act 1985 and a provision of the company's articles. Following on from this Mr Ebrahimi asked the court to find that it was "just and "equitable" to compulsorily wind-up the company. It was held by the House of Lords that
the company should be compulsorily wound-up on 'just and equitable' grounds because of Mr Ebrahimi's inability, after his dismissal, to participate in the company's
management and because profits were paid as director's remuneration.
Where there is a complete deadlock in the management of the company's affairs: Re
Yenidje Tobacco Co Ltd (1916) where two sole traders had merged their businesses
into a company of which they were the only directors and shareholders. They quarrelled bitterly, refused to speak to each other and conducted board meetings by passing notes through the hands of the secretary. One sued the other for fraud and he in turn
petitioned to have the company wound-up on just and equitable grounds. The court stated that: 'in substance these two people are really partners' and by analogy with the law of partnership [which permits the dissolution if the partners are really unable to work together] it was just and equitable in this case to wind the company up.
Where the managing director, who also represented the majority shareholding interest in
the management of the company, refused to hold general meetings, submit accounts or pay dividends: Loch v. John Blackwood Ltd. (1924).
Administration
What is an administration order?
An administration order is an alternative procedure for dealing with the affairs of an insolvent company, established by the Insolvency Act 1986. It is an order directing that, during the period in which it is in force, the affairs, business and property of the company shall be managed by a person appointed for that purpose by the court and known as 'the administrator' in accordance with Schedule B1 of the Insolvency Act 1986.
A licensed insolvency practitioner is appointed as an administrator by the court under an administration order. The order is usually sought through a petition by a company that is, or is likely to become insolvent. Administration orders were introduced by the Insolvency Act 1986 as a constructive way of trying to save a company's business.
Who may apply for an administration order?
In accordance with Schedule B1 of the Insolvency Act 1986 applications can be made by:
The company itself
The directors of the company
A creditor or group of creditors of the company [including floating charge holders over
the whole or substantially the whole of a company's property
The supervisor of a company voluntary arrangement – notice of the petition must
immediately be given to prescribed persons and cannot be withdrawn except with the leave of the court.
Under what circumstances is an application for an administration order likely to be successful? – Can one or more of the objectives of the three-part test in Schedule B of the Insolvency Act 1986 be met?
The primary objective will be to rescue the company in whole or in part as a going concern. Where a company can be rescued, then the rescue plan will be put into action. Inter alia, if the company involved is a holding company with subsidiaries this could involve them selling off one of the subsidiary companies within their group to ensure the group's long-term financial survival. In other words, 'downsizing'.
The administrator may pursue the secondary objective of maximising returns for the company's creditors as a whole, over and above what would be likely if the company were wound-up without first going into administration, if the administrator considers the primary objective is not reasonably practicable. This could involve the company concerned continuing
to trade until such time as it has satisfied outstanding customer orders and sold its remaining stock-in-trade, in the interests of a more beneficial winding-up; maximising returns for the company's creditors over and above what would be likely if the company were wound-up immediately without first going into administration.
The third objective, which will only apply if neither of the other two objectives is possible, will be to realise property, to make a distribution to one or more of the secured or preferential creditors but without "unnecessarily harming" the interests of the creditors as a whole Where there are no funds available for the unsecured creditors, the administrator will realise the company's assets and make payments to preferential creditors and fixed and floating charge holders and will arrange for the company to be placed into creditors' voluntary liquidation. An application for an administration order is likely to be successful in those cases where one or more of the objectives of the above three-part test can be satisfied e.g. the second and third objective.
It follows that an administration order will not be made where a company has already gone into liquidation: Schedule B1, Insolvency Act 1986.
Advantages of the administration order as an insolvency procedure
The two main advantages are that:
Once an administration order has been issued, it is no longer possible to commence
winding-up proceedings against the company or enforce charges on the company's assets. This major advantage is in no way undermined by the fact that an administration order cannot be made until after a company has begun the liquidation process. It is open to a secured creditor to enforce their rights and to forestall the administration procedure.
An administration order can be put in place very quickly, in response to the urgent needs
of a company and its business. The company then has the benefit of a stay on all creditors' actions and the administrator has wide powers to deal with not only the company's assets but also those of third parties subject, in some case, to the court granting leave for the proposed action. Administration is a collective procedure that, almost always in the long-term, offers better returns to unsecured creditors than an immediate liquidation.
The effect of an administration order being granted
In the event that the court makes an administration order:
A qualified Insolvency Practitioner is appointed to administer the affairs of the company
The rights of creditors to enforce debts remain suspended
All company documents must state that the company is in administration and the name
of the Administrator
Any petition for winding-up is dismissed
An administration order in effect creates a 'breathing space' for the company – it freezes
civil actions against the company and repossessions of goods from the date of the presentation of the petition. Once an administration order has been issued it is no longer possible to commence winding-up proceedings against the company or enforce charges on the company's assets – this is one of the major advantages of an
Winding-up (Liquidation)
Definition
Winding-up or liquidation is the legal term for the termination or dissolution of a company. It is comparable, in some ways, with the death of an individual or with the bankruptcy of an
insolvent person.
(Note: A limited company cannot be made bankrupt – a bankruptcy applies only to individuals and persons trading as partners.)
There are three types of liquidation under the Insolvency Act 1986:
Members' voluntary liquidation
Creditors' voluntary liquidation
Compulsory liquidation
Circumstances in which a company may be wound-up voluntarily
In accordance with Section 84(1) of the Insolvency Act 1986 a company may be wound-up voluntarily:
(a) When the period (if any) fixed for the duration of the company by the articles expires, or
the event (if any) occurs, on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring it to be wound-up voluntarily
(b) If the company resolves by special resolution that it be wound-up voluntarily
(c) If the company resolves by special resolution to the effect that it cannot by reason of its
liabilities continue its business, and that it is advisable to wind-up
(d) The decision to have a voluntary liquidation may be made because the company may be
no longer required to exist for one (or more) of a number of reasons, including:
It may have been formed for the purpose of undertaking a particular project which
has now been completed e.g. the Millennium Dome
The owner-manager may be retiring
Its original purpose [object] may have become redundant following a group
restructuring.
The distinguishing features of a members' voluntary liquidation
In accordance with Section 90 of the Insolvency Act 1986 this is where the directors are able to make a formal declaration (known as a 'statutory declaration of solvency') stating that after full inquiry into the company's affairs they are of the opinion that the company will be able to pay its debts (including statutory interest) within 12 months of the commencement of the winding-up.
Moreover, a company must be solvent in order to use this method of liquidation and in the event that the amount realised from the company's assets being insufficient to pay its creditors in full, the liquidation will be converted into a creditors' voluntary liquidation: Section 96, Insolvency Act 1986.
A company is placed into a members' voluntary liquidation on the passing of a special
resolution by the shareholders who at the same time appoint a Liquidator. On his appointment all directors' powers will cease.
Distinguishing features of a creditors' voluntary liquidation
In accordance with Section 90 of the Insolvency Act 1986 this is where the directors are
months (including the addition of statutory interest) i.e. they are cannot make a Section 89 statutory declaration of solvency prior to the commencement of the liquidation procedure. A company uses this method of liquidation when it is insolvent – in a creditors' voluntary
winding-up a formal declaration of solvency is not possible owing to the circumstances leading to the winding-up: Section 90, Insolvency Act 1986.
In this type of winding-up, the special resolution is followed by a creditors' meeting, where it is possible for a liquidation committee to be appointed: Section 98, Insolvency Act 1986. During the course of this meeting the company's directors must place before a meeting of creditors a full statement of the company's affairs: Section 99, Insolvency Act 1986. Such meetings form no part of a members' voluntary winding up.
As with a members' voluntary liquidation, the company is placed in liquidation on the passing of a special resolution by the shareholders who at the same time appoint a Liquidator. In a creditors' voluntary liquidation, in direct contrast, to a members' voluntary liquidation, both members and creditors have the right to nominate a liquidator and in the event of dispute, subject to right of appeal to the courts, the creditors' nominee prevails. In this context the liquidator is primarily accountable to the creditors.
It is the Liquidator's duty to realise the assets, investigate the company's affairs, report on the directors' conduct and distribute funds available in accordance with the Insolvency Act 1986.
Compulsory liquidation
A compulsory liquidation is a liquidation imposed by a court order, usually as a direct
consequence of a creditor's petition on the ground that the company is unable to pay its debts: Section 122(1)(f). In accordance with Section 123 of the Insolvency Act 1986, a company is regarded as unable to pay its debts if, amongst other things:
A creditor is owed more than £750 and
Presents a written demand in the prescribed form (known as Statutory Demand Form
4.1) to the company and
The company fails to pay, secure or agree a settlement of the debt to the creditor's
reasonable satisfaction.
A compulsory winding-up petition may also be presented by any of the following parties in accordance with Section 124(1) of the Insolvency Act 1986:
The company or its directors
The official receiver
The Department for Business Enterprise and Regulatory Reform (formerly the
Department of Trade and Industry)
Any contributory (a 'contributory' is any person who is liable to contribute to the assets of
the company in the event of it being wound-up).
In compulsory liquidations the official receiver is automatically appointed as Liquidator for the company concerned.
Distinguishing features of a compulsory liquidation
As with a voluntary liquidation, it is possible for a company to be placed in liquidation on the passing of a special resolution by the shareholders who at the same time appoint a Liquidator. In accordance with Section 122(1) of the Insolvency Act 1986 both solvent and insolvent compulsory liquidations are possible. A company must be solvent in order to be wound up on just and equitable grounds – see Ebrahimi v. Westbourne Galleries (1972).
This method of liquidation is appropriate where
A public limited company has been registered for a year and has failed to obtain a
trading certificate under what is now Section 761 of the Companies Act 2006: Section 122(1)(b), Insolvency Act 1986
A company does not commence business within a year of it being incorporated or
suspends business for a whole year: Section 122(1)(d), Insolvency Act 1986
A company is unable to pay its debts: Section 122(1)(f), Insolvency Act 1986
The court is of the opinion that it is just and equitable that the company should be
wound-up: Section 122(1)(g) e.g. Ebrahimi v. Westbourne Galleries (1972). The main effects of the making of a compulsory winding-up order against a company are
As soon as the order is made, all actions for the recovery of debt against the company
are stopped
The company will cease to carry on business except where it is necessary for its
beneficial winding-up (i.e. in the interests of a more favourable asset realisation)
The powers of the directors will cease and are assumed by the liquidator
The employees of the company are automatically made redundant
The Official Receiver becomes the liquidator until an Insolvency Practitioner is
appointed.
Role of the Liquidator following appointment
On appointment, the Liquidator takes over all the powers of the directors and he owes a fiduciary duty to the company. He must exercise reasonable care and skill when performing his functions. The Liquidator's powers, which enable him to carry out the winding-up are wholly set out in the Insolvency Act 1986. Amongst other things, a Liquidator's powers include the power to:
Sell any of the company's assets
Raise any money for the purposes of the liquidation by using the company's assets as