Company Registration

Winding Up 101: The ‘Just and Equitable’ Principle

The law of winding up recognizes the ‘just and equitable principle’ when an individual or a company applies for a winding up the order with the court. In this article, come find out what is the principle about and how it operates in a winding-up situation

Winding up company

Make an appointment with Company Secretary and Business Lawyer for advice and consultation

Company Law

A court can wind up a company if the company or any individual listed under the Act applies for a winding-up order to the court. Once an application is filed to the court, the court will then decide if they are reasons for the company to be wound up. One of the circumstances, as noted in the Act, is that a court may wind up a company if the court thinks that it is just and reasonable to wound up the company.

However, the Act does not define nor expound on what is “just and equitable” and how it should be applied in a winding-up scenario.  Therefore, let us dive into court cases to understand more about the principle.

What is the just and equitable principle?

The just and equitable principle (‘the principle’), was created as a common law (i.e. laws created not by legislation or statute but by the court) principle to supplement and

recognize the rights of the members of a company that is not defined in the articles/ memorandum of association of the company. 
This, however, does not in any way allows the individual or the company who filed the petition or the court to completely disregard the obligations, duties, and responsibilities he holds as a member of the company, as he is legally bound by what he agreed upon when he decided to form a company with another person/ when he decided to join the company. The court, however, recognizes that there will be instances where it is unreasonable, unjust, or inequitable for an individual to insist on upholding legal rights in a particular way.

Why it is unreasonable, unjust, or inequitable to insist on upholding legal rights?

In Ebrahimi v Westbourne Galleries Ltd and others the court held that in cases where this principle is raised, individuals had banded together to form a company on the basis of probity, good faith, and mutual confidence between the individuals. Once the basis of forming the company is broken, it could be safely concluded that it cannot continue to function if there is no mutual confidence or trust between the members of the company. Therefore, it is better for the company to be put out of its misery than to allow it to continue to exist. Allowing it to continue to be in existence would eventually create a ‘deadlocked’ company where no resolutions can be passed, thus putting the operation of the company at a standstill and rendering it inoperable.

When can this principle be invoked?

In Chong Choon Chai & Anor v Tan Gee Cheng & Anor, the court held that this principle can be invoked in diverse circumstances. For example, in the Singapore case of Sim Yong Kim v Evenstar Investment Pte Ltd, the court in its judgment listed down some of the situations where the principle could and could not apply:

“We accept that the notion of unfairness lies at the heart of the just and equitable” jurisdiction in s 254(1)(i) of the CA and that that section does not allow a member to ‘exit at will’, as is plain from its express terms. Nor does it apply to a case where the loss of trust and confidence in the other members is self-induced. It cannot be just and equitable to wind up a company just because a minority shareholder feels aggrieved or wishes to exit at will. However, unfairness can arise in different situations and from different kinds of conduct in different circumstances. Cases involving management deadlock or loss of mutual trust and confidence where the ‘just and equitable jurisdiction under s 254(1)(i) has been successfully invoked can be recharacterized as cases of unfairness, whether arising from broken promises or disregard for the interests of the minority shareholder. Unfairness can also arise in the loss of substratum cases.”

In conclusion, it must be noted that this principle can only be relied upon if there is a ‘complete deadlock’ within the company i.e. the relationship between the members is beyond the point of salvage and it is pointless to allow the company to continue to exist. To allow the principal to run riot will open up the floodgates where a member could simply run towards the court for a solution every time disagreement arises between members of the company i.e. it enables him to be relieved from the consequences of a bargain knowingly entered into by him

Make an appointment with Company Secretary and Business Lawyer for advice and consultation

Read More about our article about Company Secretary :

Winding Up Company in Malaysia

Can A Director Be An Employee Of The Company?

What is Paid-up Capital in Malaysia?

Inspection Rights Of A Company Director

Franchising & Licensing in Malaysia

Sleeping Director

Who owns Your Copyright Work?