Deficient Deadlock: Winding Up On Just And Equitable Grounds Refused - Insolvency/Bankruptcy

This week's TGIF considers an application to wind up a company on just and equitable grounds. The Court declined to make the order, finding the suggested deadlock had an air of artificiality and the application was infused with self-interest.

Key takeaways

Placing a company into liquidation on just and equitable grounds is a remedy of last resort and relief may not be granted if alternative and less drastic remedies available.
While a deadlock is a common case for winding up, more than a mere breakdown or loss of confidence is required before such an order is justified.
A court will be less likely to exercise its discretion if the person seeking relief was responsible for the breakdown of the relationship.

Background

On 31 January 2013, a special purpose vehicle (SPV) was formed to purchase an office building and convert it into a residential property. The project was to be undertaken by two builders and a property developer who, while they had worked together previously, had never done so on terms where the builders had a financial interest in the finished development.

The agreement (which was undocumented) contemplated the profit would be split with 50% for the builders and 50% for the developer.

Over the next three years, a development consent was obtained, building and construction undertaken and a final occupation certificate issued. At that stage, most of the apartments had been sold and the parties agreed to split the profits by transferring the remaining unsold units to their own personal trusts.

Shortly after completion, the Owners Corporation commenced proceedings against the SPV seeking rectification of defects. Despite a freezing order being obtained over the unsold units, the builders transferred the apartments owed to them, leaving the developer as the only party with his 'profits' to be distributed.

With the SPV's bank account essentially empty, a dispute emerged between the three parties over who should pay the costs of an expert, appointed in the defect proceedings, to assess the scope of remedial work required.

To avoid being in default of the Court's orders, the fee was paid but the revelation there was no money left sparked an inquiry by the builders who engaged a solicitor to write to the developer advising of concerns over the operation of the SPV and its solvency.

The developer was also told the two builders would vote together on all future matters, their votes equating to those of the developer, such that there was a deadlock. Caveats were subsequently lodged on the developer's unsold units to preserve the SPV's assets until after an investigation was done.

The developer then commenced proceedings to have the caveats removed which led to an application by one of the builders to have the SPV wound up on 'just and equitable' grounds.

Submissions

The builder argued that the irretrievable breakdown and loss of trust in the relationship meant the SPV could not hold meetings or make decisions as to finances. As a consequence, a provisional liquidator should be appointed to carry on the remaining business of the SPV and ensure the assets (that is, the unsold units owed to the developer for his profit share) were protected for the benefit of creditors.

The developer contended the builder was effectively seeking to 'outflank' the caveat proceedings and end the defect proceedings. His view was the SPV could still operate and the deadlock was merely a disagreement over the payment of legal fees which escalated into a dispute over distribution of profits.

A winding up, and the drastic effect of such a step on third parties, was said to be unwarranted in the circumstances.

Decision

The Court agreed with the developer and refused to place the company into liquidation, finding that:

the builder had acted unreasonably in seeking to have the company wound up instead of pursuing other available remedies (such as conducting an audit);
the application appeared to be an attempt to thwart proceedings against the SPV and was infused with self-interest; and
winding up the SPV would likely have adverse implications for the Owners' Corporation, and reputational damage for those involved in the development.

Her Honour observed that, on the evidence, it appeared the builder had embarked on a course directed to ensuring that the developer's share of the profits were used to pay the liabilities of the SPV, whilst the builders remained 'untouched'.

Comment

This decision serves as a useful reminder that, while disagreements frequently occur in the course of operating a company, much more is needed before a wind up is justified. A mere breakdown or loss of confidence may not be sufficient to enliven the discretion, especially if the company has and can continue to operate.

Moreover, the question of whether it is just and equitable to wind up a company is one of fact and depends on the circumstances of each case. However, a court is less likely to grant such relief if the person seeking that order could be regarded as responsible for the breakdown of the relationship.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.