Just and Equitable Winding Up: KFC or Chicken Farmer?

I am resurrecting this post after some editing.Under the Companies Act, one of the grounds which the Court may wind up a company is on the “just and equitable” ground. This is very different from the usual winding up proceedings based on a company’s inability to pay its debts.

One of the common examples for the imposition of these just and equitable principles is that the law takes into recognition some form of personal or quasi-partnership relationship between the shareholders. An example may be a family business, where the initial patriachal sole proprietorship has become a sprawling family empire controlled by the sons. A falling out between the shareholder-brothers may then jeopardise the relationship of mutual trust and confidence and may justify the winding up of the company.

The leading case on just and equitable winding up is that of the House of Lords decision in Ebrahimi v Westbourne Galleries Ltd and others [1973] AC 360. The principles enunciated in Ebrahimi are applicable within Malaysia, as held by the Privy Council in Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413. The Singapore Court of Appeal decision in Chow Kwok Chuen v Chow Kwok Chi and Another [2008] SGCA 37 is also an interesting case analysing the just and equitable winding up provisions.

In a particular clear cut matter, where I argued that the just and equitable principles did not apply, I simplified (whether rightly or wrongly) the principles as such:

“Imagine if you had a company, let’s call it KFC Pte Ltd…”

Imagine a company, let’s call it KFC Pte Ltd, and it happened that soon after its formation, it started to be very successful in making and selling fried chicken. Over the decades, you have different shareholders entering and exiting the company. As KFC’s chicken business got larger, other companies started to become shareholders as well. However with the drastic onset of bird flu, KFC’s board of directors makes a decision to diversify its business. KFC would no longer solely focus on fried chicken, it would start making and selling fish burgers as well.

The decision to diversify the company’s business was a purely commercial decision, and just like KFC, the company is a commercial entity, which was free to pursue other lines of business. There was no case for a failure of the substratum of company based on some form of mutual understanding.

In contrast to KFC, another scenario may perhaps justify the imposition of just and equitable considerations:

Two best friends meet and decide to form a private limited company. One has a factory to produce fried chicken, and the other friend has a large chicken farm. They decide to form this company for the sole purpose of producing and selling fried chicken. If the friend with the factory suddenly wants to start making fish burgers, then perhaps, the friend with the farm can say that look, we had this common understanding between us that the company was formed to produce fried chicken, there has now been a failure of the substratum of that company. It could then be argued that it might be just and equitable to wind up the company so that the two friends could go their separate ways.

“…whether the company was more KFC, or more of that of the chicken farmer.”

So the case may sometimes boil down to whether the company is more KFC, or more chicken farmer. Unfortunately, a case will unlikely be so clear cut to differentiate between these two scenarios and the Court will need to hear evidence, whether through affidavit or through witnesses, in order to assess whether a just and equitable winding up should be allowed.

Advertisements

3 thoughts on “Just and Equitable Winding Up: KFC or Chicken Farmer?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s