Newsletter 3

Quasi-partnerships and just and equitable liquidation

A partnership is a state of being in which two or more parties carry on a business to share the profits. There are equitable duties and liabilities of trust and confidence.

Section 32??of the Partnerships Act 1890 (UK) permits a partnership to be dissolved immediately. "Subject to any agreement between the partners, a partnership is dissolved (c)?If entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership". The Partnership Law Act 2019 (New Zealand) s 66 contains a similar provision.

The right, subject to agreement to the contrary, to dissolve a partnership allows an individual partner to bring a business to an end and withdraw his/her capital.

In Ebrahimi v Westbourne Galleries [1972] 2 WLR 1289 the HoL found that a small company in which the director/shareholders worked in the business was akin to a partnership. When one of the directors was pushed out within the terms of the constitution, he had the right (it was just and equitable) to wind up and liquidate the company.

Lord Wilberforce found that "elements which give rise to the superimposition of equitable considerations may include one, or probably more of the following: (i) an association formed or continued on the basis of a personal relationship involving mutual confidence; (ii) an agreement, or understanding, that all, or some, of the shareholders, shall participate in the conduct of the business; (iii) restriction on the transfer of the members' interest in the company. The fact that the company is a small one, or a private company, is not enough."

See also In re Upper Hutt Town Hall Co Ltd —?[1920] NZLR 125 in which Stout CJ said that there were "two factions in the company. Neither will coalesce with the other, and the continuance of the company has become impossible. That is clear from the fact that for six years no annual meeting has been held. It is not necessary that I should apportion the blame of the shareholders for this state of things. It is enough that such a condition of things exists, and that there seems no chance of any agreement being come to between the two factions of shareholders in this company. The company cannot, in fact, be carried on if this sort of thing continues, and it has continued for six years. Further, the fact of this disagreement between the shareholders has been such that the company cannot efficiently carry on its business, and those who were the founders of the company are anxious now that it should be wound up. This can do no harm to either faction, because if the company is wound up it is only a company dealing with a public hall."

In North End Motels (Hutley) Ltd, Re [1976] 1 NZLR 446, the petitioner was free to devote his time to company affairs and desired, in company with his future wife, to manage the company's motel complex, but Mr and Mrs P, without the petitioner's knowledge, had undertaken to employ Mr and Mrs S as managers thereof. Subsequently Mr and Mrs P made other decisions without reference to the petitioner. This might be describes as exclusion from participation.

Mahon J relied on the Ebrahimi principles. He considered that a petition for winding up, analogous to a dissolution of partnership, could not succeed if the complaint was based merely on a valid exercise of powers contained in the articles of association. But such acts may be outside what could fairly be regarded as having been in the original contemplation of the parties.

The lack of confidence in relation to the affairs of the company by the petitioning creditor must be a justifiable lack of confidence; it is insufficient for it to arise from a sense of frustration because of the legitimate exercise of their rights by other contributories.

The falling out of two equal shareholders or factions, as in the Upper Hutt Town Hall case, may involve insolvency in circumstances where the directors cannot agree on payments to make to keep the business going. A creditor may lose faith in their security, call it in and sue for their money. A deadlocked company may be unable to agree on whether to defend itself and a shareholder may apply to intervene in the creditor's claim to defend the claim on the company's behalf. The possibilities, twists and turns are endless.

What is of interest is that a company in which shareholders having a personal relationship, a mutual understanding of trust and confidence, restrictions on share transfer rights and/or work in the business have a right to wind the company up if they are excluded from participation, decision making and the profits of the business.