What happens when a company’s board is deadlocked to the extent that directors can no longer agree on the decisions vital to the proper running of the company and its business?
If all else fails (and this is usually a last-prize option), liquidating the company and placing it into the hands of independent liquidators may be your only choice.
A sad tale (which played out recently in the High Court) of sibling in-fighting that reduced a successful and profitable property development company to dispute and deadlock provides a perfect example. We’ll discuss the Court’s decision, its reasoning, and the three grounds on which a court may liquidate a solvent company.
“Family quarrels are bitter things. They don’t go according to any rules” (F. Scott Fitzgerald)
A company’s directors have both the power and the duty to manage the company’s affairs for its benefit.
When two or more directors are in place, it’s perhaps natural for the occasional disagreement to arise between them. Indeed, regular expression of a variety of different viewpoints and ideas can make for a strong, dynamic board and business. Provided, that is, that the directors are in the end result still able to agree on the decisions vital to their company’s continued operations.
What happens though when disagreements and disputes escalate and make it impossible to continue running the business? Typically, communications break down to the extent that decision-making is paralysed. First prize will of course always be an amicable settlement – through formal mediation perhaps, or negotiation to buy out a dissenting director’s shareholding. But if these attempts fail, the company is in big trouble.
Fortunately our law offers you an effective remedy in the form of the “just and equitable” liquidation. It comes with its own risks and can be costly, so it’s often regarded as a last-resort option (ask your lawyer for advice on the various other remedies that may be available to you), but it works. A recent High Court decision illustrates…
Sister v brothers in a deadlocked development company
- A sister and her two brothers owned, through their trusts, equal shares in a farm (partially inherited from their father and partially purchased from their uncle’s deceased estate).
- They were also the three directors (and, again through trusts, the equal shareholders) of a company formed to subdivide, develop and sell residential plots on parts of the farm.
- The company operated successfully and profitably for many years, paying substantial dividends to the shareholders, and has always been and remains solvent.
- Trouble began brewing it seems several years ago, primarily between the sister and the brother in charge of the day-to-day running of the company’s business. Serious disagreements arose around an unhappy saga of sibling fallout – including the disputed existence of a partnership, alleged fraudulent stripping of over R6m by the brothers, and a litany of purported personal and familial abuse.
- All these allegations were hotly denied, although an undertaking by the brothers to not “emotionally abuse” their sister in a settlement agreement at one point clearly indicated to the Court that the relationship breakdown was not confined to the siblings’ professional affairs. The relationship between the directors and shareholders was, said the Court, “that of partners in a family context”.
- The sister applied for the liquidation of the company on the grounds that it was “just and equitable”. This is a procedure provided in the Companies Act for a court to have the discretion – even though a company is solvent – to liquidate it in order that an independent liquidator can take over.
- The brothers opposed the application, claiming that there was no deadlock in the functioning of the company or between the directors and shareholders, but the Court disagreed. Its order liquidating the company, and its reasons for doing so, provide a useful summary of how this particular law works in practice…
3 grounds on which to wind up a solvent company
The Companies Act allows a court to liquidate a solvent company on application by director/s or shareholder/s on any of three grounds –
- “The directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and
- Irreparable injury to the company is resulting, or may result, from the deadlock; or
- The company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock;
- The shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms have expired; or
- It is otherwise just and equitable for the company to be wound up.”
That last “just and equitable” ground gives courts a wide discretion to reach a decision based on all the facts of each particular case. The Court in this matter found that the involvement of all the directors in the business had effectively come to a standstill and took into account the facts that there had not been a directors’ meeting since 2014 plus the sister had refused to sign the latest financial statements.
It concluded that “the directors do not communicate and there is clearly immense personal animosity between them, and a lack of trust and confidence”, making it difficult to see how the company could continue its business. The lack of substantiation provided by the sister to back up some of her disputed allegations did not, said the Court, detract “from the fact of the breakdown in their relationship, and the lack of trust and confidence”.
It was therefore just and equitable that the company be wound up.