Director Deadlock On Going Into Liquidation Overview
This article will consider Director deadlock on going to Liquidation and what can happen as a result.
This will be a particular problem in the case of a company with even numbers of Directors and in particular when there are only two Directors.
In the case of a Winding Up Petition, if it results in a company going into Liquidation, it would go into Compulsory Liquidation.
In order for a company to go into Compulsory Liquidation a creditor, Director or shareholder has to petition the Court for an Order that the company is wound up. It is therefore a petition for a Winding Up Order and that means that Voluntary Liquidation does not apply.
A Winding Up Petition is potentially one of the most serious issues for a Limited company to face because a Winding Up Order will in effect mean the company can no longer trade and will be wound up.
However, when a company is facing a Winding Up Petition it still has to make decisions, such as how to respond to and deal with the petition issued. As a result, a Director deadlock situation can therefore arise leaving a company unable to function when its Directors do not get along and are unable to agree on a strategy to take the company forward.
Director Decisions And Deadlock
Directors are empowered in the Articles of Association of a Limited Liability Company.
It is normal for Directors to be able to act by way of agreement. However, in some cases decisions can be taken by a simple majority at a meeting.
It is not uncommon in small owner-managed companies for there to be a degree of informality about the decision-making processes of company Directors.
However, in cases where there are two Directors, the prospect of Director deadlock is increased which can render a company unable to operate.
Director Deadlock And Going Into Liquidation
If a company is facing Liquidation via a Winding Up Petition then Director deadlock can result or simply get even worse.
If one Director is happy to let the company go into Compulsory Liquidation but another wants to continue to trade or for the company to instead opt for Voluntary Liquidation such as a Creditors Voluntary Liquidation, then a Director deadlock could develop.
Restraining A Winding Up Petition For Liquidation
If a company is already suffering a Director deadlock then how it deals with a Winding Up Petition could be affected. For example, how are solicitors to be instructed if the Directors cannot agree between themselves what the approach to the Winding Up Petition should be?
Can A Director Act Alone?
A Director who has been validly appointed to the Board of Directors may be able to act alone if powers have been delegated to them in accordance with the Articles of Association. This is commonly in effect what happens when the Board of Directors appoints a Managing Director or Chief Executive Officer.
In the case of Rushbrooke UK Ltd v 4 Designs Concept Ltd [2022] EWHC 1110 (Ch) (“Rushbrooke”), the Court considered the matter when two Directors were deadlocked. A creditor issued a Winding Up Petition and one of the two Directors purported to instruct solicitors on behalf of the company to resist it.
That Director instructed the solicitors to apply through the company for an injunction to restrain the presentation of a Winding Up Petition.
Rushbrooke Director Deadlock
The Director deadlock in Rushbrooke resulted in the other Director writing to the solicitors, NRG, and said:
In my capacity as a director of Rushbrooke, I have dis-instructed NRG as I consider the Application that has been made to be an abuse of process and predicated on a false witness statement … For example, Mr Steventon-Smith says at paragraph 34 of his witness statement that the company is successful and solvent. It is neither.
In Rushbrooke the Court considered the Court of Appeal case of Smith v Butler [2012] EWCA Civ 314:
It is clear from their judgments in Smith v Butler that the majority of the court (Arden LJ and Ryder J) qualified the decision in Mitchell & Hobbs (UK) Ltd v Mill, so that, in some cases at least, paragraph 72 of Table A may confer authority on a managing director to commence or defend proceedings on behalf of the company. However, in a case like Mitchell & Hobbs, where there were only two directors, who had fallen out, and therefore would not agree to all ratify the commencement of proceedings, the court considered that the decision in that case, that there was no authority to commence the proceedings, was correct. That is also in substance the position in the present case, where the only two directors have fallen out, and therefore there would be no agreement on a board resolution in relation to commencing or defending litigation.
As a result in Rushbrooke, the Court held that the Director attempting to restrain the presentation of the Winding Up Petition did not have authority to issue the application on behalf of the Company.
The offending Director got hit for costs and so interestingly did the solicitors, NRG because they were on notice of the Director deadlock position. The Court held had a duty to satisfy themselves they had been instructed by a Director with proper authority.
Oliver Elliot Observation
The Rushbrooke case is a notable reminder that Directors need to act with proper authority otherwise they could personally find themselves in difficulty with the Court. In the case of a two-person Director company when there is a deadlock it would be advisable for the Directors to take professional advice and generally adopt a cautious approach.
Are you a UK company Director?
If you are a Director of an insolvent company or a bankruptcy, Oliver Elliot can help you. We Know Insolvency Inside Out.
Share This Page!
What Next?
Expert Advice Is Just A Click Away
If you have any questions in relation to Director Deadlock On Going Into Liquidation then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.
Our expertise is at your fingertips.
Disclaimer: Director Deadlock On Going Into Liquidation
This page Director Deadlock On Going Into Liquidation is not legal advice and should not be relied upon as such. This article Director Deadlock On Going Into Liquidation is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.
Recent Posts / View All Posts
