Introduction
Minority shareholders are not completely helpless, as Sec 122
(1) (g) of Insolvency Act and Sec 994 of Companies Act 2006 grant the specific relief
to the minority shareholders so that the rights of the minority shareholders
are protected against the majority; but still the majority shareholders have a
right to execute plans. Following is the discussion on those aspects.
Discussion
In instances, where minority shareholders are affected
by the incorrect actions to the company by the majority (or by the directors),
the shareholders face an impossible task of forcing the directors to perform
legal action against their own-selves. In various circumstances, the courts give
authority to the minority shareholders to bring the claim “in the name of the
company”. According to S260-264 of the
Companies Act 2006, the derivative claims are justifiable in cases involving
breach of duties, negligence and breach of trust; by a director. In addition to
this, the minority shareholder should look for the possible solutions to ratify
the disputed act through negations in the form of arbitration; however, if this
fails then the claim can be brought to the court by the shareholders on behalf
of the company.
According to Section 122(1) (g) of Insolvency
Act 1986, company can be wound up by courts “if the court is of the opinion
that it is just and equitable that the company should be wound up”. This situation
occurs where mutual relationships broke down between the members or the partners,
and there is no additional alternative other than dissolving the business. In simple words, Sec 122(1) (g) of Insolvency
Act 1986 permits the courts to dissolve or windup the company on “just and
equitable grounds”. Sometimes the claimant is also asked to prove the courts
that after the winding up enough surpluses will be available for allocation to
the shareholders or the members. Moreover, the entire responsibility to prove
rests with the claimant. According to the Sec 122 (1) (g), the most convenient solution
is winding which can be done through court as well as voluntarily,
but in case of abuse of power by majority shareholders it is usually done
through court under the following situations:
Concept of Just and Equitable winding up is
applicable only in cases where the entities are QUASI partnerships and fulfils
some criterion mentioned as follow:
a)
Companies formed on the basis of mutual trust;
b)
Agreement that some or all of the shareholders
will be involved in the management;
c)
The shareholders of the company are not freely
tradable in the market, hence the aggrieved shareholder/s are stuck by the majority
in the market.
Following are the considerations that play an
important role in situations where the concept of just and equitable winding up
is applied:
i. Where
the substratum of the company has
failed and the essence of the company is lost;
ii.
Where company is fraudantly promoted;
iii.
Where a company is in a dead lock which relates
to managerial dead lock;
iv.
Breakdown of confidence in the management of the
company; in addition to this, where the relationship or the communication is
broken;
v.
Exclusion from participation in the management
where there was a relationship based on mutual confidence.
According to insolvency act, in situations where
the objective or the substratum of company fails or is fulfilled, then the
winding up can be ordered as done in following case:
Re
German Date Coffee Co [1882]
Facts: Company’s objective
was to acquire “German patent” for the manufacturing of substitute for coffee
from dates; but the patent was not granted.
Held: The Court
held that the entire substratum of the company just vanished; therefore it was must
to be wound up.
Same decision was witnessed in following case:
Re
Perfectair Holdings Ltd [1990]
In the mentioned case, the Courts held that a company should be wound up as the only purpose
behind the company was vanished. In this particular case, the court stressed
that winding-up need to be done through a liquidator.
S 122 (1) (g) of insolvency act allows the shareholders
to pull their investment with the help of winding up in cases where companies are
formed to commit a fraud against the shareholders.
Re
Thomas Edward Brinsmead & Sons [1887]
Facts: Three former
employees of John Brinsmead & Sons formed the company known as Thomas
Brinsmead & Sons, and the focus was to manufacture pianos which were planned
to be made as made by John Brinsmead & Sons. In the process the shares of
the company were floated and were heavily subscribed by the public.
Held: Court confirmed
the winding of the company, as they found it as an act of fraud.
According to S 122 (1) (g), in order to resolve
the managerial issues related to managerial deadlock, the court can declare the
winding up of the company as is the scenario with the following case:
Re
Yenidje Tobacco Co Ltd [1916]
Facts: Company had
two equal shareholders which were acting as directors of the company. The
relation between both of them broke down as they were not willing to communicate.
Held: Court
ordered Re Yenidje Tobacco Co Ltd to be wound up.
According to S 122 (1) (g), just and equitable winding-up
may perhaps result in the cases where there is a deficiency of confidence in
the capability or integrity or honesty of the management (only if company
fulfils the conditions of “QUASI partnership”). Following is the practical
example in that regard:
Loch
v John Blackwood Ltd [1924]
Facts: The Company
was controlled by majority of the shareholders, and board treated the company
as their own property and attempted to buy the shares held by minority
shareholders at undervalued price, and completely failed to organize general
meeting and to declare a dividends.
Held: Courts
ordered the company to be wound up; as it they found that there was deficiency of
confidence in the capacity of the majority shareholder.
Following is the classic example of just and
equitable winding up based on the discussed conditions especially the situation
where a private company formed based on mutual trust and confidence:
Ebrahimi
v Westbourne Galleries Ltd [1973]
Facts: “N and E”
were equivalent shareholders and were acting as the directors. In addition, N’s
son joined the company as the director as well as a shareholder, E turned out
to be a minority equally within the board and at the general meeting, and E was
voted out from the board.
Held: Courts held
that the removal of E from the board was in accordance with the articles of
association, but the fact that the formation of the company was based on the
basis of their mutual relationship, therefore courts declared it as breach of
their relation; ultimately it was declared just and equitable to wind up the
company.
Sec 994-996 of Companies Act 2006 is the
improvement of pervious act. S 994 presents the other possibilities where
courts think that the aggrieved share holders should be given remedy. According
to S 994, member of the company might be given suitable remedy under following
conditions:
ü
Operations of the company are conducted in manners
which are unfairly prejudicial to the interests of its members. Meaning that an
appeal could only be furnished against
the company whose affairs are conducted in an unfairly manner; or
ü Actual
action or the potential actions of the company are expected to be prejudicial.
O’ Neil v Philips [1999]
In O’ Neil v Philips [1999], court found that Philips only revised the
terms of Neil’s remuneration; and his behavior could have been unjust if he had
tried to utilize this voting power to eliminate Neil from the company. Moreover,
Philips’s negative response towards the allotment of additional shares was also
not unfair as the deliberate negotiations were in the process and were not yet
finalized; and most importantly, no contractual agreement took place. Additionally,
Neil mentioned that he had lesser faith in Philips, but only this argument was
unable to prove his appeal under the provision of unfairly prejudicial act. Neil’s
appeal consequently failed on the basis of the fact that he was unable to prove
that Philips’s conduct was prejudicial and unfair; this shows the importance of unfair
prejudicial towards the interest of the members as mentioned in S 994 of
Companies act 2006.
S 996 of the Companies Act 2006 provides the
suitable remedy. Following are the allowable remedies according to S 996 of Companies
Act 2006:
ü
Adjust the affairs of the company in the future;
ü
Abstain from doing the same act again;
ü
Permit the civil trial on behalf of the company;
ü
Oblige the company not to alter the articles of
association without the consent of the Court;
ü
Offer to sale to members or to company
itself.
Conclusion
In my opinion, the only repercussion of
the shareholder initiating the derivative action under S 122 (1) (g) of
insolvency act 1986 and claiming for remedy under S 994-996 of Companies act
2006 is the overall burden of cost; in many cases, the claimant might be allowed
to be indemnified by the company but the problem is that this is only possible
at end of the case given that he/she has acted realistically in bringing that action;
hence this situations is only possible if claimant goes with a stronger case
otherwise in today’s modern world the pattern of the shareholding is highly scattered
that a single shareholder is very unlikely to bear the risk of doing that.
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