328 21: Insolvency and administration Part G Legal implications of companies in difficulty or in crisis
(b) The company was formed for an illegal or fraudulent purpose or there is a complete deadlock in
the management of its affairs.Re Yenidje Tobacco Co Ltd 1916
The facts: Two sole traders merged their businesses in a company of which they were the only
directors and shareholders. They quarrelled bitterly and one sued the other for fraud. Meanwhile
they refused to speak to each other and conducted board meetings by passing notes through the
hands of the secretary. The defendant in the fraud action petitioned for compulsory winding up.
Decision: 'In substance these two people are really partners' and by analogy with the law of
partnership (which permits dissolution if the partners are really unable to work together) it was just
and equitable to order liquidation.(c) The understandings between members or directors which were the basis of the association
have been unfairly breached by lawful action.Ebrahimi v Westbourne Galleries Ltd 1973
The facts: E and N carried on business together for 25 years, originally as partners and for the last 10
years through a company in which each originally had 500 shares. E and N were the first directors
and shared the profits as directors' remuneration; no dividends were paid. When N's son joined the
business he became a third director and E and N each transferred 100 shares to N's son. Eventually
there were disputes. N and his son used their voting control in general meeting (600 votes against
400) to remove E from his directorship.
Decision: The company should be wound up. N and his son were within their legal rights in removing
E from his directorship, but the past relationship made it 'unjust or inequitable' to insist on legal
rights and the court could intervene on equitable principles to order liquidation.Re A company 1983
The facts: The facts were similar in essentials to those in Ebrahimi's case but the majority offered
and the petitioner agreed that they would settle the dispute by a sale of his shares to the majority.
This settlement broke down however because they could not agree on the price. The petitioner then
petitioned on the just and equitable ground.
Decision: An order for liquidation on this ground may only be made 'in the absence of any other
remedy'. As the parties had agreed in principle that there was an alternative to liquidation the
petition must be dismissed.3.3 Proceedings for compulsory liquidation
When a petition is presented to the court a copy is delivered to the company in case it objects. It is
advertised so that other creditors may intervene if they wish.
The petition may be presented by a member. If the petition is presented by a member they must show
that:
(a) The company is insolvent or alternatively refuses to supply information of its financial position,
and
(b) They have been a registered shareholder for at least 6 of the 18 months up to the date of their
petition. However this rule is not applied if the petitioner acquired their shares by allotment direct
from the company or by inheritance from a deceased member or if the petition is based on the
number of members having fallen below two.