The High Court had to decide whether a winding up of a company was the best alternative, despite the parties having made some progress since the proceedings were instituted.
Background:
Mr. Dosanjh was the co-shareholder and director alongside Mr. Balendran of Webb Estate Developments Ltd. The parties had, from 2011, carried on a business of real estate management and development as a limited liability partnership (LLP) which owned eight or nine properties around England. The company was incorporated on 12th February 2018 and the properties were transferred into it. Mr Dosanjh estimated the properties held by Webb to be worth about £6,850,000. Although Mr. Balendran first contested the estimate, he then broadly agreed with it.
The parties’ relationship began to break down in 2020. The principal dispute that arose between the parties was how to treat the monthly payments they received from the company and the instructions that should be given to the company's accountants in this regard. Mr. Dosanjh and Mr Balendran each drew £6,000 per month from the LLP from circa January 2017. It was agreed that the payments from the company, as successor to the LLP, would be £7,000 a month each. Mr Dosanjh viewed these payments as the repayment of directors’ loans to the company while Mr. Balendran treated them as the reimbursement of ‘expenses’.
As a result of the deadlock, the company’s accounts for 2019 could not be agreed. Mr Dosanjh unilaterally filed a set of accounts on the 20th November 2020 and continued to file accounts for the following years. Those were not approved by the board. Mr. Balendran, on the 26th of May 2022, filed amended accounts for the years ending 2019, 2020, and 2021.
Mr. Dosanjh argued that the parties were unable to work together and found that winding up was the only option based on the breakdown of the relationship of mutual trust and confidence and a functional deadlock.
Decision:
The High Court started by restating the law and that Section 122(1) of the Insolvency Act 1986 allows for the winding up of a company based on just and equitable grounds. Courts have wide discretion based on Section 125(1) of the 1986 Act. The petitioner is required to show that a tangible benefit will be derived from the winding up.
The Court then looked at the division of labour and noted that Mr. Balendran took on the lion's share of the management of Webb's properties. Mr. Dosanjh was not involved in the management of the company’s business on a day-to-day basis. There was evidence that Mr. Balendran’s intention, some years before trial, was to close the business. The Court did not accept Mr. Balendran's claim that he spent 40 to 50 hours a week managing the properties.
The Court turned to the main issue between the parties and noted that it was unlikely that the payments of £6,000 a month were related to expenses. It is well established that a director does not have a right to remuneration other than as provided for in a company's constitution or approved by its members. The Court did not receive any evidence to characterise the payments as expenses. The Judge noted “These were regular, round-figure payments that did not fluctuate to reflect any expenses incurred over the course of the month and there is no evidence of expenditure by the directors that fell to be reimbursed. There are only three other ways properly to characterise these payments to the parties as directors or shareholders. First, they could have represented compensation for the directors' time and effort, in which case they were directors' remuneration if indeed such remuneration had been approved as required by the articles. Secondly, they could have represented dividends from distributable profits if declared in accordance with the Companies Act 2006. Finally, they could have been repayments of the directors' loans to the company.”
Regarding the breakdown in trust and confidence, this referred to the sale of a property in which Mr. Balendran had not disclosed directly that he was a shareholder.
The Court agreed that, although two properties were sold, the progress was glacially slow and those sales were prompted by the trial. The Judge concluded that there was no realistic alternative other than the winding up.
Implications:
This case demonstrates that, where there is sufficient evidence to demonstrate that there is an irretrievable breakdown in the relationship of trust and confidence, courts will be willing to agree on a winding up of a company.
While the Court acknowledged that a compulsory winding up may yield a lower return, as there is no realistic alternative due to the breakdown of the relationship, it was the best alternative.