The Limits of Applying Partnership Law to Quasi-Partnership Companies: Badyal v Badyal & Ors [2019] EWCA Civ 1644 

To secure an order for the #winding-up of a Quasi-Partnership company on the Just& Equitable ground, is it necessary only to show that mutual trust and confidence between the shareholders/quasi-partners has broken down?  Hardwicke investigates the recent case of Badyal v Badyal & Ors [2019] EWCA Civ 1644

Background

The Appellant, the First and Second Respondents were brothers who carried on business in the manufacture of powder coating.  The business was set up in 1981 and traded initially as a partnership, but subsequently also as the Third Respondent; a company which the parties agreed they had treated as a quasi-company (‘the Company’).

Relations between the brothers grew strained.  Open hostility broke out in November 2014 when a letter before claim was sent by solicitors acting for the Appellant, who claimed: (i) entitlement to have the partnership dissolved; and (ii) that he was being unfairly prejudiced by the way in which the Company’s affairs were being conducted.  Matters further deteriorated in March 2015, when the First and Second Respondents began to suspect the Appellant was involved in a competing business.

By March 2016, the Appellant had presented a petition under s 994 of the Companies Act 2006, alleging a number of serious breaches of fiduciary duty by his brothers.  The Appellant, however, did not seek an order for winding up on the ‘just and equitable ground’ under s 122(1)(g) of the Insolvency Act 1986, until the First and Second Respondents took steps to remove him as a director of the Company.  By their defence and counterclaim, they denied any wrongdoing, but admitted that mutual trust and confidence had broken down.  They, however, alleged that this was due to the Appellant’s own misconduct.

In the court below, the judge found that the Appellant’s allegations against the First and Second Respondents were not made out; on the contrary, the Appellant was found, inter alia, to have breached his fiduciary duties to the Company though his involvement with the rival business.  Relief was therefore refused; both for unfair prejudice under s 994 of the Companies Act 2006 and on the ‘just and equitable’ ground under s 122(1)(g) of the Insolvency Act 1986.

The primary argument on appeal was that the trial judge had been wrong to refuse winding up on the basis that a breakdown of mutual trust and confidence between the shareholders in a quasi-partnership company cannot, as a principle of law, found a winding-up order without something more.

The Court of Appeal

McCombe LJ (with whom Simon and David Richards LJJ agreed) considered the ‘seminal authorities’ on the ‘just and equitable’ jurisdiction and considered it ‘helpful and instructive’ to see the original analogy drawn in company proceedings from the cases on partnership.  In Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 at 430, the following passage from Lord Lindley’s edition of his work on Partnership was cited:

… It is not necessary, in order to induce the Court to interfere, to show personal rudeness on the part of one partner to the other, or even any gross misconduct as a partner. All that is necessary is to satisfy the Court that it is impossible for the partners to place that confidence in each other which each has a right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it.

In Re Westbourne Galleries [1973] AC 360, at 379 C – E, however, Lord Wilberforce clearly distinguished between (i) partnerships; and (ii) companies which were recognised as ‘quasi-partnerships’ or ‘partnerships in substance.’ Lord Wilberforce considered that use of such terms may be convenient but may also be confusing: convenient because “the conceptions of probity, good faith and mutual confidence” developed from the law of partnership; confusing if, however, such terms were used in such a way that “obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations…it is through the just and equitable clause that obligations, common to partnership relations, may come in.” 

The authorities, thus, demonstrated that equity generally intervenes to enable the court to subject the exercise of legal rights under a company’s constitution to equitable considerations where to insist on such legal rights would be unfair.  In this context, McCombe LJ considered that a breakdown in mutual trust and confidence is one relevant factor, but that it is only one among a number.  The authorities also clearly showed that a petitioner may well not qualify for relief if he is “solely responsible for the situation which has arisen.”

Applied to the present case, the trial judge found that the Appellant was so solely responsible: the allegations against the Respondents were rejected and the breakdown in confidence was found to be due to his own misconduct.  Having considered the other criticisms of the judgment set out in the grounds of appeal, McCombe LJ did not find anything in the trial judge’s evaluation of the facts which indicated any identifiable flaw in his ultimate conclusion that it was not just and equitable to wind up the Company.

McCombe LJ thus having considered that the judge was entitled to dismiss the petition, dismissed the appeal.

Commentary

This case is a useful reminder that, in the words of Lord Wilberforce in the Westbourne Galleries case, “a company, however small, however domestic, is a company not a partnership or even a quasi-partnership.” There are, therefore, clear limits on the extent to which such quasi-partnerships may draw upon aspects of partnership law, which was strikingly demonstrated in this case where the partnership between the brothers was to be dissolved but an order to wind up the Company was refused.

In the case of partnerships, it remains that “all that is necessary” for a court to intervene is satisfaction that it is “impossible for the partners to place that confidence in each other.”  The emphasis on trust and confidence, primarily though the fiduciary relationship of agency, may well be justified in this context where each partner is jointly and severally liable for the debts and obligations of each other, but much less so in that of a company with its own legal personality separate from those of its shareholders and directors.

Another relevant factor identified was economic: if the Appellant’s submission were correct, in “quasi-partnership” companies, one shareholder would effectively be entitled at will to require the other shareholders to buy his shares at a fair value; all he need do is to declare that trust and confidence has broken down.  The Law Commission had further identified as a matter of principle that such right to exit ‘at will’ would “fundamentally contravene the sanctity of the contract binding the members and the company which [it] considered should guide [its] approach to shareholder remedies.”

It worth noting that McCombe LJ clearly appreciated that equitable considerations developed in partnership law nevertheless continue to be relevant to company proceedings, but its application will depend on all the circumstances.  For example, he did not take the position that a breakdown in mutual confidence and trust between shareholders in a quasi-partnership could never ground a winding up petition: “It may be that, in some cases, where there is not, as here, egregious misconduct on the part of the corporator seeking relief, but there is a complete loss of confidence and/or deadlock, winding-up is the only appropriate course” (emphases original).   Going the other way, McCombe LJ also took care to “avoid creating the impression that every breach of fiduciary duty by one corporator in a quasi-partnership company will automatically render his exclusion from management fair,”

Finally, it is worth noting that the case also serves as a clear reminder that, although it may have been at one time conventional to add winding up in the prayer of a s 994 petition, this is arguably no longer appropriate.  McCombe LJ firmly rejected the submission that the judge had wrongly held that winding up on the ‘just and equitable’ ground was an ‘exceptional’ remedy and a ‘last resort.’

Fulham Football Club (1987) Ltd. v Richards [2012] Ch 333, the current Practice Direction 49B (Order under section 127 of the Insolvency Act 1986), and s 125(2) of the Insolvency Act 1986 all show that winding up will generally be refused in a petition presented under s 994 if there is some other remedy available to the petitioner and the court is of the opinion they are acting unreasonably in seeking to have the company wound up.  In most cases, a share purchase order will be considered the most appropriate remedy.