3.2.4.6 Breach of a fundamental agreement or understanding

The company involved in this case is Westbourne Galleries Ltd. The business of this company was originally set up as a partnership. Nazar and Ebrahimi participated in the management of the partnership equally and the profits were shared accordingly. Subsequently, the business of the partnership had been taken over by the Ltd. Nazar and Ebrahimi became sole directors of the company and shareholders for equal parts. After the company's formation, Nazar and Ebrahimi both transferred 10% of their shareholdings to George, who also became one of the directors. All profits of the company were distributed by way of directors' fees and no dividends were paid. After a few years, Nazar and George dismissed Ebrahimi from the board. Ebrahimi still held a minority shareholding of 40% in the company. The resolution to remove Ebrahimi from the board of directors was legally based on the power of the majority of the shareholders to dismiss directors, a statutory power which, at that time, was laid down in

S. 184 CA 1948.2 Afterward, Ebrahimi sought for an order for the winding-up of the company on the just and equitable ground.

In first instance, an order for winding-up was given. The order was set aside by the Court of Appeal. The Court of Appeal took the view that in order to receive a winding-up order, the petitioner has to show that the removal from the board of directors was not bona fide in the interests of the company or, the equivalent, that no reasonable man could think that his removal was in the company's interests. On the facts submitted in this case, bad faith could not be proven, so the order was set aside.

The House of Lords did not agree with the view of the Court of Appeal. The House of Lords considered the bad faith standard to be too narrow and put forward that there could be more situations in which the winding-up remedy can be invoked.

In the judgment of the House of Lords, Lord Wilberforce considered that the words fust and equitable exist in partnership law as well.3 He stated that these words could provide a bridge between cases of the just and equitable winding-up remedy and principles of equity developed in partnership law. Lord Wilberforce put forward that the words fust and equitable denote that the exercise of legal rights, such as the dismissal of a director, can be subject to equitable considerations:

"(...) the words "just and equitable" (...) are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way."4

Lord Wilberforce held that the superimposition of equitable considerations requires specific circumstances. In general, it requires the existence of a quasi-partnership or an in-substance partnership, although he did not exclude superimposition of equitable considerations in other circumstances. He put forward:

"It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly, the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company — so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. (...) The just and equitable provision (...) comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic, if broken, the conclusion must be that the association must be dissolved."5

"A company, however small, however domestic, is a company and not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in."6