When the people who own a company fall out to such an extent that they can no longer run it together, one option is to ask the court to wind the company up, sell its assets and divide the proceeds, even if the business is solvent. The power to do this on "just and equitable" grounds is real, although a recent High Court decision is a sharp reminder that it remains a last resort, where any petitioner who caused the breakdown or comes to court with unclean hands is likely to be turned away.

What is "just and equitable" winding up?

A shareholder can ask the court to wind a company up on the ground that it is "just and equitable" to do so. The classic case for such an action relates to "quasi-partnerships" – a small company that, although a company on paper, is really run like a partnership, based on mutual trust and personal participation. Where that relationship of trust breaks down, or else the company becomes deadlocked and cannot take decisions, the court has the power to wind it up.

Winding up is a drastic step, as it destroys the company rather than resolving any underlying dispute. For that reason, it is a remedy of last resort, governed by equitable principles, and the petitioner must come with "clean hands", as the court will refuse relief where a more suitable alternative remedy is available. Successfully bringing an unfair prejudice petition (under Section 994 of the Companies Act 2006) usually results in a court-ordered share buy-out at fair value, keeping the business largely intact.

The case in point concerned a valuable, debt-free company that owned a portfolio of London rental properties, which were held equally by two sides of a family through nominee companies. Relations had collapsed irretrievably: the bank account had been frozen, no meetings were being held, and there had already been costly litigation, with one side petitioning to wind the company up (under Section 122 of the Insolvency Act 1986).

The Judge accepted that this was in effect a quasi-partnership and, given that trust had deteriorated beyond repair, the company was in effect deadlocked. Despite acknowledging this fact, the Judge refused to wind the company up for three reasons: First, the petitioner was found to be the sole cause of both the breakdown and the deadlock, which brings the legal point that you cannot rely on a breakdown you yourself brought about to precipitate a winding up to the fore. Second, the petitioner did not have clean hands, as he had used the company's money to fund his own side of the litigation, diverting around £1m of rental income to a company he controlled, and had failed to produce the financial records the courts had ordered. Third, an alternative path existed in that the dispute could and should have been pursued in the Isle of Man, where it had already been litigated.

Implications:

• The first lesson is that winding up is a blunt instrument, and the court will not reach for it simply because relations have soured. The irreconcilable breakdown of a quasi-partnership is insufficient in and of itself, as the court will take a step back and ask who is responsible and whether there is a better way to resolve any impasse.
• The second is that conduct matters enormously. A shareholder who hopes to invoke the court's equitable jurisdiction needs to have behaved equitably themselves. Misusing company funds, diverting its income, or ignoring court orders are precisely the things that will cost a petitioner the relief they seek, however substantive the underlying deadlock.
• The third is to consider alternatives first. Where the real complaint is that a shareholder is being treated unfairly, an unfair prejudice petition seeking a buy-out is usually the better route, as it can resolve the dispute without destroying a valuable business.
• Fourth, in those cases where proceedings are already running elsewhere, the court expects them to be concluded rather than sidestepped.

In short, the just and equitable jurisdiction serves as a safety valve for broken business relationships, albeit an equitable one. A dysfunctional company that is otherwise solvent will not be broken up as a first resort, least of all at the request of the person who made it so.

Disclaimer: This simplified summary of a UK legal case is for general information only. It is not legal advice, may omit important detail, and may not reflect later developments or appeals. Please read the full judgement and seek professional legal advice before acting.