In a recent High Court decision, a petition for the winding up of a family company was struck out on the basis that the petitioner acted unreasonably in seeking to wind up the Company rather than pursuing alternative options.
Background
The Company had run a successful farming business and the Petitioner and Second Respondent were brothers who each held 30 of the shares in the Company (First Respondent) and a further 30 jointly between them. The Third and Fourth Respondents (their mother and father) each held the remaining 5 shares.
In April 2010, the Petitioner informed the Respondents that he wished to operate an independent faming business. In October 2013, a letter of intent signed by all four members of the company was sent regarding the intention for the petitioner and the second respondent to both have viable independent farm businesses. In 2014, the business of the Company’s therefore continued by operating two separate farms in practice, however, by early 2016 the proposed formal demerger was still not finalised.
In 2018, the Petitioner’s solicitors sent a letter before claim to the Respondents stating that without sensible demerger terms he would pursue legal remedies including a petition for the winding up of the Company. The Respondents made an offer that the Petitioner sell his shares to the Company at a fair value and realise his investment as a shareholder in the Company. The offer was not accepted and a winding up petition was issued and served.
As noted in the judgment although the petition did not specifically refer to s.122 IA 1986 it appeared to be common ground that the order was sought on the just and equitable ground pursuant s.122(1)(g). The grounds upon which the petition was based included that the relationship between the Petitioner and Respondents had irretrievably broken down and the purpose for which the Company has been run since 1987 had fallen away.
The Respondents applied to strike out the petition on the grounds that:
- it disclosed no reasonable grounds for making a winding-up order (pursuant to CPR rule 3.4(2)(a), rule 3.4(5) and section 125(2) of the Insolvency Act 1986 (“IA1986”)) and/or
- it was an abuse of process pursuant to CPR rule 3.4(2)(b).
Section 125 IA1986 sets out the powers of the court on hearing a petition. The court gave consideration to s.125(2)(b) IA 1986 which precludes the making of a winding up order if the court is of the opinion that an alternative remedy is available to the Petitioner and thus they are acting unreasonably in seeking to have the company wound up.
In addition, the Insolvency Proceedings Practice Direction at paragraph 22.1 refers to the “undesirability of asking as a matter of course for a winding up order as an alternative to an order under s.994 Companies Act 2006.” The grounds for the petition seem to fit more naturally with s.994 Companies Act 2006 (“CA 2006”) as relate to the Company’s affairs having been conducted in a manner that is unfairly prejudice to the Petitioner.
The court found that the Petitioner therefore had acted unreasonably in seeking to wind up the Company as he had two viable alternative remedies: (i) pursuing the fair offer for his shares and (ii) pursuing a claim pursuant to s.994 CA 2006 whereby the Court could make an order for the Respondents or the Company to purchase the Petitioner’s shares as well as determining whether the alleged unfair conduct of the Respondents should be compensated and reflected in adjustments to the value of those shares.
Having found that the Court would not make a winding-up order, the Judge decided it was an appropriate case to exercise his discretion to strike out the petition. The Petitioner had chosen “to expose himself to the risk that the Court would strike out the petition in which he sought only one, draconian remedy”.
The Petitioner subsequently confirmed that he would be seeking permission to amend the petition.
By way of comment it is clearly an important consideration to make sure the correct remedy and procedure is sought. This dispute called fairly obviously for a petition pursuant to section 994 CA 2006 i.e. an unfair prejudice petition, rather than seeking straight winding up of the Company. The decision highlights the flexible and discretionary nature of winding up. As the nuclear option in many cases, protagonists should think carefully as to whether winding up is in fact appropriate and proportionate, or whether there are other more suitable dispute resolution procedures available.
