Liquidating a Company Due to Shareholder Dispute Deadlock

Shareholder disputes can have various causes, and they will always significantly disrupt a company’s operations and profitability.

When shareholders clash, it can lead to a deadlock, paralyzing the company’s decision-making process. In such situations, various legal remedies are available, including the drastic step of liquidating the company.

This article explores the legal test for liquidating a company in British Columbia due to a shareholder deadlock, drawing insights from relevant case law and legislation.

Reasons for Internal Disputes Within a Company

Internal disputes within a company can arise for several reasons, including:

Conflicting Interests: Shareholders may have different goals and objectives for the company, leading to disagreements on business strategy, investments, and distributions.
Management Deadlock: In situations where shareholders have equal voting rights, disagreements over (financial, operational, HR etc.) decisions can lead to a management deadlock, making it impossible to make key decisions.
Breach of Fiduciary Duty: Directors or majority shareholders may act in their self-interest, breaching their fiduciary duty to the company and minority shareholders.
Misappropriation of Funds: We see that many disputes arise from allegations of financial mismanagement, misappropriation of company funds, or fraud.
Lack of Communication: Poor communication and lack of transparency can breed mistrust and lead to misunderstandings and disputes among shareholders.

What Is a Deadlock in a Company’s Shareholders’ Dispute?

A deadlock in a company’s shareholders’ dispute occurs when shareholders are unable to agree on the management of the company, leading to a standstill in decision-making.

This often happens when there is an equal division of voting rights, and neither side can outvote the other. Sometimes, the majority shareholders disagree therefore preventing them from effect key decisions by way of a vote. All these can be complicated by a company controlled by family members – our clients can sometimes be siblings or sometimes spouses.

Deadlocks paralyze a company, preventing it from making crucial decisions and potentially leading to its decline as nobody is willing to take charge of the company’s operations.

What Are the Remedies for a Deadlock?

Several remedies are available for resolving shareholder deadlocks which can be:

Negotiation and Mediation: Shareholders can attempt to resolve their differences through negotiation or mediation, which involves a neutral third party facilitating discussions.
Arbitration: Disputes can be submitted to arbitration, where an independent arbitrator makes a binding decision on the matter.
Court Orders: In some cases, shareholders may seek court orders to break the deadlock, such as orders for the sale of shares or the appointment of a receiver.
Liquidation: As a last resort, shareholders may seek the liquidation of the company, which involves selling off its assets and distributing the proceeds among creditors and shareholders.

When Is Liquidation an Appropriate Remedy to a Deadlock?

The test for liquidating a company in BC due to a shareholder deadlock is found in Section 324 of the Business Corporations Act.

The court may order the liquidation of a company if it “considers it just and equitable to do so.” This broad discretion allows the court to consider various factors, which include:

Irreconcilable Differences: Whether the shareholder differences are irreconcilable and cannot be resolved through other means. In most of the cases that we handle, the differences are based on allegations of financial wrongdoing and mismanagement underlined by mutual distrust.
Company’s Best Interests: Whether liquidation is in the best interests of the company, considering its financial health and future prospects.
Shareholder Expectations: The reasonable expectations of the shareholders when they invested in the company. The important consideration here is the word “reasonableness,” as most shareholders’ disputes contain an element that some expectations are infeasible or unreasonable under the company’s particular circumstances.
Conduct of the Parties: The conduct of the shareholders, including any oppressive or unfairly prejudicial behaviour.

Real-Life Examples

Several BC court cases provide insights into when liquidation is an appropriate remedy for a shareholder deadlock:

In No. 20 CR Ventures Ltd. v. Andrex Developments (1985) Ltd., 2019 BCSC 405 the court ordered the liquidation of a company due to a deadlock between two equal shareholders who were unable to agree on the management of the company.
Petersen v. Hawley, 2021 BCSC 2348: The court refused to liquidate a company by way of an immediate court order where the deadlock was primarily due to a personal dispute between two brothers within a family who were shareholders, and there was no evidence that the company was in financial distress. The court allowed the shareholders 60 days to work out a solution.
Hui v. Hoa, 2015 BCCA 128: The BC Court of Appeal considered the wide discretion that a court has in resolving a shareholders’ deadlock, which is between a mother and son in this dispute. The Court of Appeal upheld a lower court’s decision to refuse to liquidate a company, stating that liquidation should not be used to “monetize” a shareholder’s investment when alternative remedies are available. The Court of Appeal emphasized the importance of the courts respecting the company’s structure, which regulates how the company’s principals manage corporate affairs.

When Liquidation Is Not Appropriate as a Solution to a Corporate Deadlock

Liquidation is a drastic remedy and is not always appropriate for resolving a corporate deadlock.

Courts have recognized that liquidation should not be used as a means for a shareholder to exit an investment when alternative remedies are available.

In situations where the company is financially healthy and there is a possibility of resolving the deadlock through other means, such as mediation or arbitration, courts may be reluctant to order liquidation.

When to consider liquidating a company?

Shareholder disputes can have serious consequences for a company, and deadlocks can paralyze its decision-making process.

Liquidation is a legal remedy available in BC to resolve deadlocks, but it is a drastic step that should be considered carefully.

The court has broad discretion to determine whether liquidation is “just and equitable,” considering various factors, including the irreconcilability of the dispute, the company’s best interests, shareholder expectations, and the conduct of the parties.

While liquidation can provide a way out of a seemingly intractable situation, it is essential to explore all other possible solutions before resorting to this measure.

Contact Roland Luo in Vancouver for Professional Advice on Shareholder Disputes

If you have questions about terms in shareholders disputes and are considering liquidating the company’s assets, contact Roland Luo. We have experience in assisting clients to resolve deadlocks and oppressive behaviour by using alternative remedies e.g., arbitration and mediation and have assisted clients to appoint receivers and liquidators.

Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, as well as clients across Canada and the United States. To schedule a confidential consultation, contact us online or by phone at 604-800-4628.