Company deadlock - making the right move

A company in deadlock is usually a company on the brink of insolvency. The impact on employees, directors and shareholders can be huge. Navigating a deadlock situation and deciding on the best way to respond requires specialist advice. Our corporate dispute solicitors Morgan Rees and George Gwynn consider a recent case of company deadlock in which one of the shareholders asked the court to wind up the company on “just and equitable” grounds. The court refused. Morgan and George consider the key takeaways and practical implications for business owners.

Background

The dispute concerned the Whitehall Partnership Limited (“the Company”), which was a company owned in equal 50/50 shares by a formerly married couple, Mr and Mrs Taylor. They were both directors of the Company. Unfortunately they divorced and they were unable to continue working together.

Mr Taylor sought a “just and equitable” winding up order under the Insolvency Act 1986 on the basis that the Company was deadlocked and there was a breakdown in trust and confidence between the directors.

Mrs Taylor disagreed. She argued that the Company should continue to trade and that the deadlock and lack of trust were caused mainly by Mr Taylor.

The key question before the court was whether there were other remedies available to Mr Taylor and whether he was acting unreasonably by seeking a winding up order as opposed to a different remedy.  In particular, the court commented that there was “a clear case” for the Company to be placed into administration and expressed some surprise that Mr Taylor had not pursued this avenue, especially given that he had the benefit of legal advice.

The court found that Mr Taylor was using the proposed winding up as an exit strategy from the Company without having to pay Mrs Taylor full value for her shares. He had set up competing enterprises and, if the Company was wound up, could take control of its clients and customers and transfer them to his new businesses. The court would not exercise its discretion in his favour because it found several instances of bad conduct. The court held that pursuing an administration order was an “obvious course of action” which Mr Taylor should have pursued.

Practical points

Successfully navigating a company through the challenge of a deadlock requires you to make the right move. Consider the below as starting points.

1. Always consider a three-person board if possible. Unless specific voting rights apply, then a three-person board is much less likely to end up in a deadlock scenario than a two person one.

2. If you are setting up a company as a married couple, provide for ways to ensure that the longevity of the company is not dependent on the longevity of the marriage. This means seeking legal advice and obtaining properly drafted Articles of Association and/or a Shareholders’ Agreement at the outset. The companies that end up in deadlock are the ones which never give any thought to the possibility and thus make no provisions in their documents to avoid such a scenario.

3.  If a dispute is unavoidable, make sure you properly consider and evaluate the options available to you. Winding up a company is a last resort and other options might be more appropriate, such as an administration order or seeking directions from the court about the conduct of a board or general meeting pursuant to section 306 of the Companies Act 2006.

If you are concerned about company deadlock, the conduct of your fellow directors or shareholders, please contact Morgan Rees and George Gwynn on 01384 410 410 or via mrees@georgegreen.co.uk or ggwynn@georgegreen.co.uk.