Plenty of companies are founded by two people sharing the same vision for a new and innovative business venture. They pool their resources, devote their time in equal measure, and as such, hold an equal share in the company. While this is typically done in good faith, with both individuals tacitly acknowledging the other’s value to the company, it can cause problems down the line.
As neither individual owns a controlling share of the company, stalemates can be common the moment a difference of opinion occurs. If neither side can persuade the other to budge, this can jam up decision-making and cause growth to grind to a halt. If this difference of opinion escalates, causing a rift between the two directors, liquidation may become a topic for discussion. However, what happens if the other side disagrees?
In this article, Clarke Bell will discuss whether a 50% shareholder can liquidate a company at their own discretion, and how such obstructive disagreements can be overcome.
If you are a 50% shareholder, you have one main tool at your disposal to force the liquidation of your company – a winding-up petition. In this context, a winding-up petition functions quite similarly to how it normally does when submitted by an insolvent company’s creditors. It will be submitted to the courts, the necessary details surrounding your situation will be given, and they will decide on the course of action. However, although the general function is similar, a winding-up petition submitted by a 50% shareholder works a bit differently from what you might be used to.
When submitted by a 50% shareholder, a winding-up petition takes the form of a “just and equitable” winding-up petition. Whereas a standard winding-up petition would simply demonstrate to the courts that a company has failed in its obligation to creditors, thus initiating a compulsory liquidation, the “just and equitable” variant aims merely to break the deadlock between shareholders. Once you hand over the details of your situation to the courts, they will decide upon the path forward while taking into account the interests of both parties. The exact outcome depends on the situation at hand, and how both parties have acted.
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Outcomes of a “just and equitable” winding-up petition
Once you submit a “just and equitable” winding-up petition, essentially leaving the decision up to the courts, you will receive one of several outcomes. Generally, the more common outcome is that the courts will suggest that the shareholder who desires the continuation of the company buys out the shareholder who doesn’t. This way, both parties get their preferred outcome, and can go their separate ways.
While the above scenario might be more common, it isn’t the only outcome of a “just and equitable” winding-up petition. In some cases, a winding-up petition on just and equitable grounds can result in the company being wound up. For such an outcome, certain prerequisites typically need to be met beforehand.
For a “just and equitable” winding-up petition to result in a company’s liquidation, the company must have started down a different path than it was initially intended. This could be either because the company has strayed from its founding principles and purpose, or because a shareholder intended for the company to pursue one goal, but it pursued another instead. If either has happened, then there are grounds for the courts to rule in favour of the company’s liquidation.
However, although the winding-up of a company is a potential outcome, it is rare indeed. The courts are the deciding factor, and they are typically quite reluctant to rule in favour of a company’s liquidation. They will consider all factors before ruling, and prioritise anything that doesn’t result in the winding-up of a company. If no other outcome can be achieved, then the courts will rule in favour of a winding-up procedure.
If a winding-up petition is successful, then the liquidation of the company will begin in short order. The exact outcome of this procedure is partially dependent on the financial state of the company, with a solvent company having a better outcome for shareholders than an insolvent company.
If a solvent company is liquidated, the money raised from selling assets and emptying company accounts will be distributed between the two 50% shareholders. Once the liquidation is finalised, and the company is wound up, both shareholders can go their separate ways with their respective share of the company.
If an insolvent company is liquidated, the scenario unfolds a bit differently. The company will have its assets sold and accounts emptied as usual, but the proceeds will be distributed amongst creditors instead, rather than the shareholders. If any funds remain after the creditors are repaid, the shareholders will receive an appropriate share. For many insolvent companies, shareholders will not receive anything at the end of the process.
In the vast majority of cases, it’s best to defuse a disagreement before either side gets entrenched in their view and refuses to budge. Solving a dispute before it reaches a deadlock leaves room for more potential solutions, instead of forcing a choice between a buyout or liquidation.
If you find yourself approaching a deadlock with a 50% shareholder in your company, seeking professional advice is often a good idea. Professional advice can help prevent a deadlock from occurring, avoiding the significant disruption to company operations that often follows suit. Even if you decide to take the matter to the courts, obtaining professional counsel early can be greatly beneficial to your position.
Clarke Bell can help
If your company is struggling, whether that be due to shareholder disagreement or financial problems, let Clarke Bell be there to help. We have more than 28 years of experience in helping directors and their companies through their problems, ensuring they find the best solution for their situation. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.
