Overview Of A 50% Shareholder Forcing Liquidation
The answer to the question Can A 50% Shareholder Force Liquidation? is it depends.
It depends on who the shareholders are and who the Directors are. It does not necessarily follow that they will be the same parties in the same proportions.
It is tempting to answer the question with a “no” but that would not be accurate. It can be done.
It can even be done without going to Court and obtaining a Winding Up Order. However, where there is a dispute between two shareholders that each own 50% of the share matters can become difficult, particularly if there is no shareholders agreement that sets out how such matters are to be resolved.
Perhaps unsurprisingly when two people want to embark upon a joint venture through a 50-50 Limited Company they may overlook to consider what could happen in the future if a dispute might arise.
Passing The Special Resolution For Liquidation
In order for a company to go into Voluntary Liquidation the starting point to prepare for Liquidation is to pass a resolution of the Board of Directors to convene formal meetings of the company for a winding-up resolution to be passed by the shareholders. The problem that can arise is being able to pass a special resolution which requires 75% or more of the voting shareholders to approve it in order for it to be passed.
The passing of the special resolution is controlled by the Articles of Association which is part of the company’s constitution. The Articles of Association of a company is explained on the page What Is Limited Liability Of A Company.
A common issue is the Articles of Association, typically require a quorum (minimum number) of 2 members to hold a meeting of the company except if the company only has one member in light of Section 318 of the Companies Act 2006:
(1) In the case of a company limited by shares or guarantee and having only one member, one qualifying person present at a meeting is a quorum.
(2) In any other case, subject to the provisions of the company’s articles, two qualifying persons present at a meeting are a quorum …
As a result a company with only two members often cannot conduct its business at a formal meeting without both members being present.
Sole Director Companies With 50% Shareholders
So a 50% shareholder who is the sole company Director can initiate the process of voluntary Liquidation such as Creditors Voluntary Liquidation or indeed a solvent Liquidation ie. a Members Voluntary Liquidation. He or she does not require the agreement of the other 50% shareholder to start the Liquidation process. The question is will it be successful in placing the company into Liquidation?
Resolution By Meeting
The problem that can arise is once the procedure to pass a special resolution is started if one 50% shareholder votes in favour and the other against then the special resolution will not be passed. To start a Liquidation the resolution requires 75% or more of the votes cast when the process is conducted via a formal meeting. However, in some cases, a shareholder may not for some reason participate and as a result, the special resolution could, in theory, get passed but only if this is permitted by the company’s Articles of Association. Given section 318 of the Companies Act 2006 requires at least two persons to be present at a company meeting except if the Articles of Association say otherwise.
It is in theory possible for a 50% shareholder to force matters and therefore to liquidate a company even when there is a dispute and the other shareholder wishes to block the resolution to put the company into Voluntary Liquidation. However, that will depend on the Articles of Association.
Resolution By Written Correspondence
However, if the process is conducted by way of a written resolution then the person in favour of Liquidation cannot pass a resolution for Voluntary Liquidation even if the other shareholder does not vote.
When votes are to be cast through a written resolution procedure in the case of a special resolution they require 75% or more of the total shareholders to vote in favour.
Two 50% Shareholders With The Same Directors
If the company structure is such that the Shareholders and the Directors are the same people then usually if the Model Articles are used by the Company then in order for them to start a Liquidation process the Board Resolution would require both Directors to vote in favour of the process leading to Liquidation. The Model Articles require a minimum of two Directors to vote at a Board Meeting when there is more than one Director on the Board in light of Section 11 of the Model Articles of Limited companies:
11.—(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision—
(a) to appoint further directors, or
(b) to call a general meeting so as to enable the shareholders to appoint further directors.
As a result, in the case of a dispute, it will be far more difficult for a 50% Shareholder to liquidate a company. However, that is not the end of the story.
50% Shareholders Dispute And Company Liquidation
When there is a dispute between two 50% Shareholders the question is how can the deadlock be broken up. How can two people with opposite wishes for a company where Liquidation is concerned, resolve matters?
If after the parties have done all they can do to resolve a dispute and there is no prospect of an agreement then the Shareholder who wants the company to go into Liquidation can look to resolve matters by way of what is called a ‘just and equitable’ winding up petition.
What Is A Just And Equitable Winding Up Petition?
A just and equitable winding-up petition is a process whereby the party who wants to place the company into Liquidation can petition the Court for the company to be put into Compulsory Liquidation by having it make a Winding Up Order.
The Court will examine all the circumstances and typically look at the dispute in some detail. If there is a viable trading entity then the Court may be reluctant to make a Winding Up Order if it would in effect destroy a trading business. In such circumstances, it might order one party who does not wish to liquidate to buy out the other to the value of its shareholding.
The Court will retain discretion as to whether to grant a just and equitable petition. It does however offer another route to enable a 50% Shareholder the ability to liquidate a company.
Obtain Professional Advice On Forcing Liquidation
If you are facing a 50% Shareholder dispute then it is important to get professional advice at the earliest possible point in time. If a company is in a deadlock due to a dispute among its two 50% Shareholders this can seriously disrupt its trading position.
This can have a negative impact on profitability that could also affect the value of the business for its two Shareholders.
Oliver Elliot has experience with Shareholders involved in such disputes so please do not hesitate to get in touch.
