YENIDJE TOBACCO CO. LTD., RE (1916) 2 CH. D. 169
YENIDJE TOBACCO CO. LTD., RE (1916) 2 CH. D. 169
FACTS
- In Re Yenidje Tobacco Co. Ltd., two tobacco manufacturers, Rothman and Weinberg, amalgamated their businesses into a private limited company.
- They were the only shareholders, with equal voting rights through their 'A' shares.
- However, there was animosity between them, leading to disputes and costly arbitration, including a situation when Rothman accused Weinberg of fraud related to the company's formation. They were not on speaking terms, and board meetings were dysfunctional.
ISSUE
- Whether the animosity between the two sole shareholders/directors, who were effectively in a partnership within a private company, justified the compulsory winding up of the company?
HELD
The Court of Appeal held the company could be wound up as just and equitable under the Companies (Consolidation) Act 1908 section 129 (now Insolvency Act 1986, section 122(1)(g)) as the only way to break the deadlock. Lord Cozens-Hardy MR said the following.
- Is it possible to say that it is not just and equitable that that state of things should not be allowed to continue, and that the Court should not intervene and say this is not what the parties contemplated by the arrangement into which they entered?
- They assumed, and it is the foundation of the whole of the agreement that was made, that the two would act as reasonable men with reasonable courtesy and reasonable conduct in every way towards each other, and arbitration was only to be resorted to with regard to some particular dispute between the directors which could not be determined in any other way.
- I have treated it as a partnership, and under the Partnership Act of course the application for a dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company?
- I think that in a case like this we are bound to say that circumstances which would justify the winding up of a partnership between these two by action are circumstances which should induce the Court to exercise its jurisdiction under the just and equitable clause and to wind up the company.
COMMENTARY
“If it becomes impossible to manage a company’s affairs because the voting power at board and general meetings is divided between two dissenting groups, the court (now Tribunal) will resolve the deadlock by making a winding up order. The most obvious kind of deadlock is where the company has two directors who are its only shareholders and who hold an equal number of voting shares, if they disagree on major questions in respect of the management of the company, their disagreement cannot be resolved at a board meeting or by a general meeting, and management decisions will cease to be made. In this situation the Tribunal will make a winding up order, even though there is a provision in the company’s articles that one director shall have a casting vote at board meetings,10 or that disputes shall be settled by arbitration.”
“(i) Deadlock.—Firstly, when there is a deadlock in the management of a company, it's just and equitable to order winding up. The well-known illustration is Yenidje Tobacco Co Ltd, re:
W and R, who traded separately as cigarette manufacturers, agreed to amalgamate their business and formed a private limited company of which they were the shareholders and the only directors. They had equal voting rights and, therefore, the articles provided that any dispute would be resolved by arbitration, but one of them dissented from the award. Both then became so hostile that neither of them would speak to the other except through the secretary. Thus there was a complete deadlock andconsequentlythecompanywasorderedtobewoundupalthoughits business was flourishing.
"But the 'just and equitable' clause should not be invoked in cases where the only difficulty is the difference of view between the majority directorate and those representing the minority."