Business relationships can break down for many reasons. A disagreement over strategy, a loss of trust between members, exclusion from management or a complete deadlock can leave a company unable to function effectively.
In a number of cases, the dispute can be resolved through negotiation, a shareholder buyout or an unfair prejudice petition. In others, the relationship may have deteriorated so completely that there is no realistic prospect of the business continuing.
In these cases, a just and equitable winding up petition is one of the most powerful remedies available in the event of a breakdown. Unlike many remedies which seek to preserve the company, the company is ended through compulsory liquidation ordered by the court.
Because of its potentially devastating consequences, the courts generally regard just and equitable winding up as a remedy of last resort. However, where a company can no longer function fairly or effectively, it can provide an important safeguard for members and a means of bringing a dysfunctional business relationship to a conclusion.
In this guide, we provide an overview of just and equitable winding up petitions under section 122(1)(g) of the Insolvency Act 1986, focusing on the legal framework, procedure, how it differs from an unfair prejudice petition, and practical considerations.
Table of Contents
- Just and Equitable Winding Up v Standard Creditor’s Petition
- Legal framework
- Who Can Bring a Just and Equitable Winding Up Claim?
- Grounds for a Just and Equitable Winding Up Petition?
- Examples of Just and Equitable Winding Up Scenarios
- Consequences of a Winding Up Order
- Procedure
- Alternatives to Winding Up a Company
- Seeking Legal Support
- FAQs
Just and equitable winding up v a standard creditor’s petition
Winding up petitions are commonly associated with unpaid debts and insolvency, but this is specific to a standard creditor’s petition.
Unlike a standard creditor’s winding up petition, a just and equitable winding up petition is often concerned with fairness between shareholders rather than whether a company can pay its debts. The company may be profitable and solvent but nevertheless incapable of continuing because of shareholder disputes, deadlock or an irretrievable breakdown in trust and confidence.
For this reason, just and equitable winding up petitions frequently arise alongside minority shareholder rights disputes, unfair prejudice claims and shareholder exits.
Legal framework
Under section 122(1)(g) of the Insolvency Act 1986, the court may order that a company be compulsorily wound up if it is of the opinion that it is just and equitable to do so.
A petitioner must demonstrate that some tangible benefit will result from the winding up. In the case of a member, the member will usually need to show there is likely to be a surplus to members. If there is no such benefit, or if the court considers the petition has been issued for some improper collateral purpose, unconnected to their shareholding, the court will refuse making an order.
Importantly, once a winding-up petition has been presented, any transactions the company enters into may later be declared void if a winding-up order is made. This can expose directors to personal liability. In practice, the petition also often leads to the company’s bank accounts being frozen. As a result, issuing a petition is a highly aggressive step and can cause the company to collapse, regardless of the eventual outcome to the petition.
Who can bring a just and equitable winding up claim?
Subject to certain conditions being met, a petition may be presented by:
- Members, including members to whom shares have been transferred or transmitted, but not registered
- Directors
- Creditors, including contingent or prospective creditors
- The company itself
In shareholder disputes, the most common petitioners are members of the company who believe there is no realistic way for the business relationship to continue.
Just and Equitable grounds
Although the jurisdiction is broad and discretionary, just and equitable grounds have commonly been established in the following instances:
Shareholder deadlock
Where members are unable or unwilling to agree, resulting in paralysis at board or shareholder level. Relief may be refused if the petitioner caused the deadlock or where the stalemate results from the proper operation of the company’s constitution.
Loss of substratum
Where the company’s original and main purpose has been achieved or can no longer be pursued, such that its only remaining function is essentially to realise its assets and be wound up. It is not sufficient if alternative purposes contemplated by the constitution remain viable, even if the original commercial objective has failed.
Mismanagement
Where the directors’ conduct in managing the company justifiably destroys a member’s confidence, typically due to serious mismanagement, lack of probity, or bad faith.
The loss of confidence must relate to how the company is run, and not merely dissatisfaction with being outvoted or internal disputes.
A breakdown of trust and confidence (in a quasi-partnership)
Under English law, a quasi‑partnership typically arises in small, private companies where, although incorporated, operates in substance like a partnership. Common features include mutual trust and confidence; an understanding the participants will manage the business together; and often restrictions on share transfers.
In such cases, a complete and irreparable breakdown in trust between members may justify winding up on just and equitable grounds. Relief is not barred simply because both parties contributed to the breakdown, but may be refused where the petitioner is solely at fault. Exclusion from management, contrary to a shared understanding, can justify winding up, unless the exclusion is justified (for example, due to the petitioner’s serious misconduct).
Examples of just and equitable winding up scenarios
Examples frequently encountered in practice include:
- Two 50:50 shareholders who are unable to agree on any significant business decision.
- A family company where relationships have broken down irretrievably.
- A shareholder who has been excluded from management despite an expectation of involvement.
- A company established for a specific venture that can no longer proceed.
- A business suffering from complete paralysis because key individuals refuse to cooperate.
- Circumstances where the conduct of management has destroyed trust and confidence in the company’s affairs.
Every case turns on its own facts, and the court will always examine the wider context before deciding whether winding up is appropriate.
Consequences of a winding up order
A winding up order places the company into compulsory liquidation and results in the appointment of a liquidator. The liquidator’s role is to realise the company’s assets (including claims vested in the company or arising in the liquidation) and distribute the proceeds to creditors. Any surplus is then shared among the members. Once the process is complete, the company is dissolved.
Therefore, whilst a winding up petition may help a member recover value from a company, members should not assume that liquidation will provide a better financial outcome than a negotiated exit or shareholder buyout. To the contrary, the costs of the liquidation are likely to reduce the funds available for distribution.
For this reason, the courts will often consider whether alternative remedies, including an unfair prejudice petition or shareholder buyout, would provide a more proportionate solution.
Procedure
Proceedings are commenced by presenting a winding up petition to the court. The petition must be supported by evidence demonstrating that it is just and equitable to wind up the company.
The courts may then:
- Consider the evidence
- Review any opposition to the petition
- Give directions for the management of the case
- Decide whether a final winding up order should be made
What are the alternatives to winding up a company?
The court will consider whether an alternative remedy, particularly an unfair prejudice petition under section 994 Companies Act 2006, is more appropriate.
Where a member presents a petition and the court concludes there is some other remedy available or they are acting unreasonably, the court may decline to make an order winding up the company.
Common alternatives include negotiated shareholder buyouts, unfair prejudice petitions under section 994 of the Companies Act 2006, mediation, derivative claims and applications for injunctive relief.
Just and equitable winding up vs unfair prejudice petitions
There is considerable overlap between just and equitable winding up petitions and unfair prejudice claims. The same facts may support both forms of action.
For example, exclusion from management, breakdown of trust and confidence or oppressive conduct may potentially give rise to both remedies.
The key difference often lies in the remedy sought and the outcome achieved. Whereas an unfair prejudice petition typically seeks to preserve value and facilitate a shareholder buyout, a just and equitable winding up petition seeks to bring the company to an end altogether.
You may find our in-depth guide on unfair prejudice claims useful further reading.
Conclusion
A just and equitable winding up petition is a powerful but ultimately terminal remedy. Given the consequences of liquidation, it is typically used as a measure of last resort or leverage in shareholder disputes. Early specialist advice is essential to assess strategy and protect your commercial position.
Seeking legal support in a winding up claim
At Napthens, we advise shareholders, directors and companies on all aspects of shareholder disputes, including unfair prejudice petitions, just and equitable winding up claims, shareholder exits, injunctions and insolvency-related disputes.
Whether you are considering bringing a petition, defending one, or exploring alternative options such as a negotiated buyout, mediation or restructuring, our team can help you assess the available remedies and develop a strategy focused on achieving the best commercial outcome. Get in touch today via our form to speak with an expert.
FAQs
A just and equitable winding up petition is a court application under section 122(1)(g) of the Insolvency Act 1986 asking the court to place a company into compulsory liquidation because it is fair to do so. It is commonly used in shareholder disputes involving deadlock, exclusion from management or a breakdown in trust and confidence.
No. A company can be profitable and able to pay its debts but still be wound up on just and equitable grounds where shareholder disputes, deadlock or other circumstances make it impossible for the company to continue functioning effectively.
A quasi-partnership company is a company that operates with many of the characteristics of a traditional partnership, including mutual trust and confidence and an expectation that members will participate in management. A breakdown in these relationships can sometimes justify a just and equitable winding up petition.
If the court makes a winding up order, a liquidator will be appointed to realise the company’s assets and distribute the proceeds to creditors. Any remaining surplus will then be distributed to shareholders before the company is dissolved.
Members, directors, creditors and, in some circumstances, the company itself may be entitled to present a petition subject to the statutory requirements.
Examples include shareholder deadlock, breakdowns in trust and confidence, exclusion from management in a quasi-partnership company, loss of substratum and serious mismanagement.
Members may consider a just and equitable winding up petition where there is shareholder deadlock, a complete breakdown in trust and confidence, exclusion from management in a quasi-partnership company, or where no realistic alternative remedy such as a shareholder buyout is available.
No. A creditor’s petition is usually based on a company’s inability to pay its debts, whereas a just and equitable winding up petition typically concerns fairness issues arising within the company and its management.
Alternatives may include a negotiated shareholder buyout, mediation, unfair prejudice proceedings, derivative claims, injunctions or changes to the company’s governance arrangements.
Not necessarily. However, the court will usually consider whether another remedy, such as a shareholder buyout or an unfair prejudice petition, would be more appropriate. Where a shareholder unreasonably pursues winding up despite a realistic alternative remedy being available, the court may refuse to make a winding up order.
Generally, yes. A just and equitable winding up petition is often regarded as a remedy of last resort because it typically results in the company being placed into compulsory liquidation and ultimately dissolved. The courts will usually consider whether a less drastic remedy, such as an unfair prejudice petition under section 994 of the Companies Act 2006, could adequately address the issue.
Sven Clarke | Partner
Sven Clarke is a partner in the litigation team, based in the firm’s Manchester office.
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