Forming a limited company can be a great way to structure your business or partnership, open new lines of credit, limit liability, and formalise decision-making frameworks. However, it also changes the relationship between business owners, because in forming a company you are creating a new entity in creating a limited company which has a separate legal personality to you as an individual, allowing for a degree of separation between your personal and business interests.
The way you structured the company when you set it up will be crucial to the question of what you can do if something goes wrong. Whether you and your associates are director-shareholders, or simply shareholders, will have a bearing, as will any agreements between you as to the operation of the company.
What can you do when you’re stuck in a company with someone with whom you can no longer work with? We set out some of the legal options which could be open to you.
Unfair prejudice
The court has the power, under Part 30 of the Companies Act 2006 to grant a shareholder of a company relief if that shareholder can show that they are suffering “unfair prejudice” as a result of the way the company’s affairs are being conducted. In other words, if the other shareholders or directors are operating the company contrary to a minority shareholder’s interests, the court can step in to help.
The law does not require a court to follow a particular solution, or make a particular order. The court is given discretion to make such order as it sees fit for granting suitable relief (in other words, the court is given leeway to solve the problem before it in whatever way works best). Examples of available options include:
- Regulating the conduct of the company’s affairs in the future;
- Requiring the company to refrain from doing or continuing the act complained of, or to do an act that the shareholder complains has not been done;
- Authorising further proceedings to be brought in the name of the company (for example for breaches of directors’ duties);
- Prohibiting the company from making changes to its articles of association; and
- Directing the purchase of the shares of one shareholder by another or by the company itself.
In the context of smaller companies, where a relationship exists between the shareholders and directors, this final option is often best and in reality the most often imposed choice.
Winding up
Another option is to petition the court to wind up (i.e. dissolve) the company. The court has the power, under section 122 of the Insolvency Act 1986, to wind up a company for a variety of reasons, but the most important of these for the purposes of this article is when the court is of the opinion that it is just and equitable (in other words, fair in all the circumstances), that the company should be wound up.
This can fairly be described as the “nuclear option” for shareholders in dispute. Should the petitioner succeed, the company will soon after cease to exist, with its assets distributed between its shareholders.
Commonly, petitions rely on one or more of the following bases (but this is not a requirement):
- Loss of substratum: this is where the main reason for the company’s existence has been achieved or may no longer be pursued.
- Deadlock: where the shareholders are unable to co-operate in managing the company, which leads to the company being unable to function at board or shareholder level (for example where there are two shareholders with 50% holdings, or two directors and no tie breaking provision).
- Mismanagement of the company leading to a loss of confidence.
- Irretrievable breakdown in trust and confidence at a “quasi partnership company”.
- Exclusion from management of a quasi partnership company.
Some of these bases are only available to certain kinds of company – these “quasi partnerships” are companies which are formed by people who have a relationship of trust and confidence, on the basis that they will all manage that company; much like a partnership – hence the name – the court can decide whether a company is a quasi partnership depending on all the circumstances.
This article was co-written by Ted Bennett-Cronk and Toby Claridge.
How we can help you
This article lists some of the options available if you are struggling to work with your business partners. Every situation is different and our specialist business ownership and exit disputes team can help you find a solution to a business ownership problem.