Deadlock: when directors and/or shareholder’s can’t agree and a business grinds to a halt, is becoming increasingly common in UK private companies. While some recent Court decisions reinforce that the Court can and will step in, these are often time consuming and costly.
Courts will step in as last resort when where a company cannot function
In a recent case of Dosanjh v Balendran, the relationship between two directors and equal shareholders of a company had irretrievably broken down: they could not agree the company’s accounts, how to sell key property and an attempt to resolve the dispute by way of a buyout failed as the price offered was deemed far too low. As a result, the Court determined that the petitioning shareholder had no effective remedy remaining and there was no realistic alternative to winding-up.
However, winding up is still a remedy of last resort - not every breakdown will justify ending a company. In similar cases the Court has historically refused to wind-up companies where they are still successfully trading and/or shareholders have not explored or exhausted reasonable alternatives.
Courts can break deadlock without winding up a company
In Webster V EMSM Global, a board was stuck because two shareholder groups each controlled an equal number of shares but neither holding a majority. Shareholders tried to resolve the deadlock by seeking to appoint an independent director, but due to the deadlock the board could not agree to circulate the resolution.
The Court confirmed its inherent jurisdiction to compel circulation of the resolution and stop the deadlock from continuing.
Takeaways
While these cases demonstrate that the Court can and will intervene to resolve matters when deadlock occurs, the best course of action is to plan ahead:
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Plan ahead with a strong Shareholders’ Agreement – many disputes escalate because no clear mechanism exists for breaking a tie and simply including a robust process can prevent disputes from escalating.
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Act early when tensions arise – Courts expect shareholders to try practical alternatives before pursuing extreme measures.
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Don’t let deadlock drag on – the longer a Company is paralysed, the more inclined the Court will be to intervene, possibly in ways that you didn’t anticipate.
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