3.2.5 The decline of the winding-up remedy

In 1945, the Cohen Committee, engaged in a company law review, expressed the opinion that often the just and equitable winding-up does not lead to a desired outcome for minority shareholders. The committee identified two reasons for this: the break-up value of the assets may be low and often the only available purchaser is the majority shareholder who oppressed the minority shareholder.1 Based on these arguments, the Cohen Committee recommended providing the court with wider powers to settle disputes between shareholders.

Subsequently, the legislator introduced a new and separate remedy, which became known as the oppression remedy. This remedy was then found in S. 210 CA 1948. Since the renovation of this remedy in 1980, it has been named the `unfür prejudice remedy'.2 Pursuant to this remedy, the court can order the buy-out of a shareholder by the co-shareholders or by the company at a für price. A buy-out is a less drastic remedy than the winding-up of the company. The unfür prejudice remedy provides the courts with the option to settle a dispute between various shareholders or a shareholder and the company in a less radical manner than by means of a winding-up the company.

The introduction of the unfür prejudice remedy signified a decline in just and equitable winding-up cases. This can be explained by pointing to several developments. The following developments describe how botte the legislator and the courts have tried to restrict the application of the just and equitable winding-up in favour of the unfür prejudice remedy.

A first development comprises the wide scope the unfür prejudice remedy has been given by the courts, endorsed by the House of Lords in the landmark decision 0 'Neill v. Phillips.3 The wide scope of this remedy causes overlap with that of the just and equitable winding-up. Moreover, in 0 'Neill v. Phillips, the House of Lords allowed the application of certain principles, derived from the winding-up remedy, onder the unfür prejudice remedy. These principles relate to breaches of informal agreements between shareholders, which are also dealt with in the above-mentioned case of Ebrahimi v Westbourne Galleries. These developments have led to the result that the unfür prejudice remedy has become a competitor of the just and equitable winding-up, although one that is more flexible and that has the advantage of less severe consequences.

Secondly, application of a winding-up remedy in circumstances where the unfür prejudice remedy can be applied is discouraged by the legislator. The legislator introduced S. 125 (2) IA 1986, which enables the courts to strike out applications on the ground of the just and equitable winding-up. This provision is known as the alternative remedy provision. The provision states:

Alternative remedies within the meaning of S. 125 (2) IA 1986 are the unfür prejudice remedy and the offer for the purchase of the shares of the petitioner at a price that is independently valued. Whether it is unreasonable to ask for a winding-up if an alternative is available depends on the facts of the case. Practice shows that the impact of the alternative remedy provision is rather low. Courts seem rather reticent to strike out petitions for a just and equitable winding-up. The provision is applied only in cases where it is obviously unreasonable that the petitioner is seeking an order for winding-up.4

Furthermore, as described in § 3.2.3, a Practice Direction is aimed at the courts to strike out a petition for a just and equitable winding-up if an alternative remedy, i.e. application of the unfür prejudice remedy, would be more appropriate.5

Lastly, in Re Guidezone Ltd, a Court of Appeal case from 2000, Parker J considered that application of the just and equitable winding-up outside the scope of the unfür prejudice remedy is no longer possible.6 Obviously, his view narrows the scope of the just and equitable winding-up. The question whether the view of Parker J is standing law is subject of debate in English legal literature.

To start with, there is evidently an overlap between the two remedies. The question is, however, whether this overlap is partial or complete. In Re R A Noble & Sons (Clothing) Ltd, a case decided before Re Guidezone Ltd, the judge held that the overlap is partial. In this case, the petitioner sought relief under the unfür prejudice remedy or, in the alternative, for an order for the winding up of the company on the grounds that it was just and equitable to do so. This case involved the situation of breakdown of confidence.

It is of interest that Nourse J was of the opinion that sooner or later a new case will come before the court in which it will be necessary to examine the relationship between both remedies more closely.7

A possible hint that Re R A Noble & Sons (Clothing) Ltd is outdated is found in 0 'Nein v Phillips, a case before the House of Lords. This case is the leading authority on the unfür prejudice remedy. In 0 'Nein v Phillips, Lord Hoffmann considered that a successful unfür prejudice petition does not require that the facts also have to lead to the conclusion that it is just and equitable to wind up the company. To ground this, Lord Hoffmann cited the observation of Mummery J in Ex parte Estate Acquisition and Development Ltd:

Lord Hoffmann pointed out that the parallel between both remedies does not lay in the conduct that is remedied. He observed that the parallel between both remedies is in the principles upon which the remedies are applied. Thus, on the same principles, conduct can be considered to be unjust, inequitable or unfür.8

The case of Re R A Noble & Sons (Clothing) Ltd seems to be overruled by Re Guidezone, a Chancery Division case. In his judgment, Parker J observed that in 0 'Neill v. Phillips, a parallel was drawn between the jurisdictions of both remedies, which lead to the application of the principles of Re Westbourne Galleries in the unfür prejudice remedy. He also observed that in 0 'Nein v. Phillips, Lord Wilberforce limited the scope of the unfür prejudice remedy. This limitation took place in order to balance "the breadth of discretion given to the court and the principle of legal certainty".9 Parker J advanced that he found it difficult to believe that the effect of this limitation would be to transfer "business from the section 459 jurisdiction to the winding-up jurisdiction".10 Accordingly, he concluded that the winding-up jurisdiction is at the very least not wider than the unfür prejudice remedy jurisdiction. Parker J. adduced that this proposition is consistent, considering the character of the winding-up order, namely, that it is an order of last resort. In his view, it would be extremely unfortunate and inconsistent with the judgment in 0 'Nein v. Phillips and to s. 125 IA 1986 to rule otherwise. As a final point, he put that Re R A Noble & Sons (Clothing) Ltd is no longer authorative in this respect.11 The view of Parker J. is supported by several legal authors.12

Boyle and Acton contest the correctness of the judgment of Parker J by pointing out that, despite the desirability of this view, the House of Lords in 0 'Neill v. Phillips has not explicitly addressed the issue to what extent the ambit of the two jurisdictions coincide with each other.13

In another, more recent Court of Appeal case, Stanley Burnton LJ put forward that the view of Parker J the case of Re Guidezone Ltd no longer should be followed.14 Stanley Burnton LJ held:

Until now, this view is neither confirmed nor rejected by the House of Lords, and so, uncertainty remains.

A possible solution for ending this debate would be to add the winding-up order to the set of orders available to the court in the unfür prejudice remedy. These orders of the unfür prejudice remedy are found in S. 996 CA 2006.16 The attractiveness of this solution has been discussed for some years. The discussion was started when it appeared that petitioners often joined a petition for a just and equitable winding-up with a petition for an unfür prejudice remedy. According to the Law Commission for England and Wales,17 as appears from its 1996 consultation paper and 1997 report about shareholder remedies, there are several arguments for joining a petition for a winding-up with the unfür prejudice remedy.

Firstly, by adding a petition for a just and winding-up to a petition for an unfür prejudice remedy, s. 127 IA 1986 can be applied.18 This possibility puts more pressure on respondents. Secondly, at that time (before O'Neill v. Phillips and Re Guidezone), it was believed that both remedies differed in scope. Therefore, a petition for both remedies could give the petitioner more chance of success. To end with, whereas a winding-up cannot be ordered under the unfür prejudice jurisdiction, a combination of petitions provides the court with more flexibility in handling the case. The advantage of this combination is that a court could choose the most appropriate remedy.19

The Law Commission raised the question of whether a winding-up order should be added to the range of orders available under the unfür prejudice remedy. The Commission argued that the combination could streamline shareholder remedies.

According to the Commission, several objections are to be considered. First of all, the Law Commission rejected the argument that a merge would not be not possible because the concerning remedies have a different nature. The winding-up will lead to the end of the company, as the company continues to exist when the unfür prejudice remedy is applied. The Commission argued that by way of a winding-up the exact same result may be reached as in the case of a buy-out order under the unfür prejudice remedy, for it can ultimately put the majority in position to run the company. The majority may buy the business from the company to be wound up. Secondly, the Commission was not afraid that the addition encourages shareholders to petition for a winding-up. It was argued that seeking a winding-up could be discouraged as much under the unfür prejudice remedy as it can be under the present law. Thirdly, the Commission was of the opinion that inclusion of a winding-up order also needed the consideration of the position of creditors. On the condition that necessary safeguards are built in for creditors and the company, the Commission recommended the integration of the winding-up order in the unfür prejudice remedy. In the view of the Law Commission, a single remedy could give the court maximum flexibility to deal with the matters involved.20

The Company Law Reform Steering Group,21 expressed that a small majority of the respondents in the open consultation they initiated was in favour of the combination of remedies. These respondents put forward that the addition would streamline proceedings, add flexibility and strengthen the hands of petitioners.22 Some of them were of the opinion that the winding-up remedy has to be placed under tight court control. Nevertheless, the CLR did support neither the Law Commission nor the respondents on this subject. The CLR reported responses advancing that companies would be subject to prolonged uncertainty, that employment would be threatened and that abuse might be possible. The overriding argument for the CLR was that adding the power of winding-up to the unfür prejudice remedy may cause the risk of endangering the viability of companies. The CLR, therefore, pleaded to maintain the situation of a separate winding-up remedy, which in their view offered more safeguards against abuse.23

Hannigan states that the rejection by the CLR of the merge of the remedies needs to be revised in the light of Re Guidezone.24 She argues that the mere breakdown of confidence and trust does not justify a winding-up and points to the fact that in the cases in which a winding-up was ordered it was additionally established that parties' relationship had broken down to such an extent that it was no longer possible to carry on the business.25 At present, no developments can be discovered on part of the legislator. In the White Paper on company-law reform of 2005, the Government did not pay attention to this subject.26

The effect of these developments is that courts apply the just and equitable winding-up remedy predominantly as ultimum remedium. Only in very exceptional circumstances is an order for a winding-up preferred to an order for the buy-out of a shareholder under the unfür prejudice remedy.