Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.2.4.4:3.2.4.4 Loss of substratum

Exit rights of minority shareholders in a private limited company (IVOR nr. 72) 2010/3.2.4.4

3.2.4.4 Loss of substratum

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

A company will loose its substratum, if the company achieved or failed the purposes for which it is formed.1 These purposes can be found in the objects clause in the articles of association of the company. An example of loss of substratum is the ancient case Re German Date Coffee Co.2

The case of Re German Date Coffee Co is about a company, which had two main objects, as followed from its memorandum of association.3 The first object held that the company would acquire a German patent for the production of a coffee substitute made from dates. The second object was that the company would exploit this invention or improvements of it. Unfortunately, the patent was never obtained and it turned out that it would never be granted. Meanwhile, the company was successfully manufacturing coffee substitutes made from dates, though not onder the German patent. Jessel MR ruled that the company was not set up for the making of such substitutes, but was set up for the purpose of exploiting a particular German patent. For this object, the shareholders entered into a partnership with each other. Now that the patent would never exist, the purposes for which the company was set up would never be achieved. In the words of Jessel MR:

"(...) the minority shareholders have a right to say, "We did not enter into a partnership on the terras."

Consequently, the Chancery Division ordered the winding-up of the company.

The scope of this category is very narrow: it is only possible to obtain a winding-up if it is impossible for the company to carry out the objects for which it has been incorporated. This will rarely be the case as most companies have extensive objects laid down in their articles of association.4 Further to s. 31 CA 2006, the articles of association may restrict the company's objects. If the articles of association do not restrict the company's objects, its objects are unrestricted. Recently, this liberal rule has been introduced by s. 31 (1) CA 2006.

In companies with just a few shareholders, the purposes for which the company has been set up can sometimes be derived from agreements between shareholders. In the more recent case of Virdi v Abbey Leisure Ltd, the Court of Appeal accepted that if there is an understanding between parties that a sole project has to be undertaken by the company and the project is finished, it could be just and equitable to wind up the company.5

The case of Virdi v Abbey Leisure Ltd concerned a company with three shareholders. The company's objects were widely drafted including all kinds of activities in the leisure industry. There was an alleged agreement between the shareholders that the company should undertake one single project: the acquisition, refurbishment and management of a nightclub. After a certain amount of time, the nightclub was sold and the project was finished. Two of the shareholders, who were directors as well, wanted to start new ventures with the company, using the funds earned in the first project. The third shareholder, who held 40% of the issued share capital, wanted his investment back and because of the alleged agreement claimed that he did not want the company to start new projects. The Court of Appeal held that on the assumption that the agreement existed, the third shareholder was entitled to a winding-up order.

Deze functie is alleen te gebruiken als je bent ingelogd.