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Ebrahimi -v- Westbourne Galleries Ltd. and Others (On Appeal from In Re Westbourne Galleries Ltd.)

Court: House Of Lords

Date: 3 May 1972

Coram: Lord Wilberforce, Viscount Dilhorne, Lord Pearson, Lord Cross of Chelsea and Lord Salmon

References: [1972] 2 WLR 1289


Their Lordships took time for consideration.

JUDGMENT

3 May 1972

LORD WILBERFORCE.

My Lords, the issue in this appeal is whether the respondent company Westbourne Galleries Ltd. should be wound up by the court on the petition of the appellant who is one of the three shareholders, the personal respondents being the other two. The company is a private company which carries on business as dealers in Persian and other carpets. It was formed in 1958 to take over a business founded by the second respondent (Mr. Nazar). It is a fact of cardinal importance that since about 1945 the business had been carried on by the appellant and Mr. Nazar as partners, equally sharing the management and the profits. When the company was formed, the signatories to its memorandum were the appellant and Mr. Nazar and they were appointed its first directors. Of its issued share capital, 500 shares of #1 each were issued to each subscriber and it was found by the learned judge, after the point had been contested by Mr. Nazar, that Mr. Ebrahimi paid up his shares out of his own money. Soon after the company's formation the third respondent (Mr. George Nazar) was made a director, and each of the two original shareholders transferred to him 100 shares, so that at all material times Mr. Ebrahimi held 400 shares, Mr. Nazar 400 and Mr. George Nazar 200. The Nazars, father and son, thus had a majority of the votes in general meeting. Until the dispute all three gentlemen remained directors.

The company made good profits, all of which were distributed as directors' remuneration. No dividends have ever been paid, before or after the petition was presented.

On August 12, 1969, an ordinary resolution was passed by the company in general meeting, by the votes of Mr. Nazar and Mr. George Nazar, removing Mr. Ebrahimi from the office of director, a resolution which was effective in law by virtue of section 184 of the Companies Act 1948 and article 96 of Part I of Table A. Shortly afterwards the appellant presented his petition to the court.

This petition was based in the first place upon section 210 of the Companies Act 1948, the relief sought under this section being an order that Mr. Nazar and his son be ordered to purchase the appellant's shares in the company. In the alternative it sought an order for the winding up of the company. The petition contained allegations of oppression and misconduct against Mr. Nazar which were fully explored at the hearing before Plowman J. [1970] 1 W.L.R. 1378. The learned judge found that some were unfounded and others unproved and that such complaint as was made out did not amount to such a course of oppressive conduct as to justify an order under section 210. However, he made an order for the winding up of the company under the "just and equitable" provision. I shall later specify the grounds on which he did so. The appellant did not appeal against the rejection of his case under section 210 and this House is not concerned with it. The company and the individual respondents appealed against the order for winding up and this was set aside by the Court of Appeal. The appellant now seeks to have it restored.

My Lords, the petition was brought under section 222 (f) of the Companies Act 1948, which enables a winding up order to be made if "the court is of the opinion that it is just and equitable that the company should be wound up." This power has existed in our company law in unaltered form since the first major Act, the Companies Act 1862. Indeed, it antedates that statute since it existed in the Joint Stock Companies Winding up Act 1848. For some 50 years, following a pronouncement by Lord Cottenham L.C. [Ex parte Spackman (1849) 1 Mac. & G. 170, 174] in 1849, the words "just and equitable" were interpreted so as only to include matters ejusdem generis as the preceding clauses of the section, but there is now ample authority for discarding this limitation. There are two other restrictive interpretations which I mention to reject. First, there has been a tendency to create categories or headings under which cases must be brought if the clause is to apply. This is wrong. Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances. Secondly, it has been suggested, and urged upon us, that (assuming the petitioner is a shareholder and not a creditor) the words must be confined to such circumstances as affect him in his capacity as shareholder. I see no warrant for this either. No doubt, in order to present a petition, he must qualify as a shareholder, but I see no reason for preventing him from relying upon any circumstances of justice or equity which affect him in his relations with the company, or, in a case such as the present, with the other shareholders.

One other signpost is significant. The same words "just and equitable" appear in the Partnership Act 1892, section 25, as a ground for dissolution of a partnership and no doubt the considerations which they reflect formed part of the common law of partnership before its codification. The importance of this is to provide a bridge between cases under section 222 (f) of the Act of 1948 and the principles of equity developed in relation to partnerships.

The winding up order was made following a doctrine which has developed in the courts since the beginning of this century. As presented by the appellant, and in substance accepted by the learned judge, this was that in a case such as this the members of the company are in substance partners, or quasi-partners, and that a winding up may be ordered if such facts are shown as could justify a dissolution of partnership between them. The common use of the words "just and equitable" in the company and partnership law supports this approach. Your Lordships were invited by the respondents' counsel to restate the principle on which this provision ought to be used: it has not previously been considered by this House. The main line of his submission was to suggest that too great a use of the partnership analogy had been made; that a limited company, however small, essentially differs from a partnership; that in the case of a company, the rights of its members are governed by the articles of association which have contractual force; that the court has no power or at least ought not to dispense parties from observing their contracts; that, in particular, when one member has been excluded from the directorate, or management, under powers expressly conferred by the Companies Act and the articles, an order for winding up whether on the partnership analogy or under the just and equitable provision, should not be made. Alternatively, it was argued that before the making of such an order could be considered the petitioner must show and prove that the exclusion was not made bona fide in the interests of the company.

My Lords, I must first make some examination of the authorities in order to see how far they support the respondents' propositions and, if they do not, how far they rest upon a principle of which this House should disapprove. I will say at once that, over a period of some 60 years, they show a considerable degree of consistency, and that such criticism as may be made relates rather to the application of accepted principle to the facts than to the statements of principles themselves.

The real starting point is the Scottish decision in Symington v. Symington's Quarries Ltd. (1905) 8 F. 121. There had been a partnership business carried on by two brothers who decided to transfer it to a private limited company. Each brother was to hold half the shares except for a small holding for a third brother to hold balance for voting. resolution was passed in general meeting by the votes of one brother together with other members having nominal interests that he should be sole director. The other two brothers petitioned for a winding up under the just and equitable provision and the court so ordered. The reasons for so doing, given by some of their Lordships of the First Division, are expressed in terms of lost substratum or deadlock - words clearly used in a general rather than a technical sense. The judgment of Lord M'Laren, which has proved to be the most influential as regards later cases, puts the ground more generally. He points out, at p. 130, that the company was not formed by appeal to the public: it was a domestic company, the only real partners being the three brothers:

In England, the leading authority is the Court of Appeal's decision in In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426. This was a case of two equal director shareholders, with an arbitration provision in the articles, between whom a state of deadlock came into existence. It has often been argued and was so in this House, that its authority is limited to true deadlock cases.

I could, in any case, not be persuaded that the words "just and equitable" need or can be confined to such situations. But Lord Cozens-Hardy M.R. clearly puts his judgment on wider grounds. Whether there is deadlock or not, he says, at p. 432, the circumstances

Warrington L.J. adopts the same principle, treating deadlock as an example only of the reasons why it would be just and equitable to wind the company up.

In 1924, these authorities were reviewed, approved and extended overseas by the Judicial Committee of the Privy Council in an appeal from the West Indian Court of Appeal (Barbados), Loch v. John Blackwood Ltd. [1924] A.C. 783. The judgment of the Board delivered by Lord Shaw of Dunfermline clearly endorses, if not enlarges, the width to be given to the just and equitable clause. The case itself was one of a domestic company and was not one of deadlock. One of the directors had given grounds for loss of confidence in his probity and (a matter echoed in the present case) had shown that he regarded the business as his own. His Lordship quotes with approval from the judgments of Lord M'Laren in Symington v.Symington's Quarries Ltd., 8 F. 121 and of Lord Cozens-Hardy M.R. in In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426.

I note in passing the Scottish case of Thomson v. Drysdale, 1925 S.C. 311 where a winding up was ordered under the just and equitable clause at the instance of a holder of one share against the only other shareholder who held 1,501 shares, clearly not a case of deadlock, and come to In re Cuthbert Cooper & Sons Ltd. [1937] Ch. 392, a case which your Lordships must consider. The respondents relied on this case which carries the authority of Simonds J. as restricting the force of the just and equitable provision. The company was clearly a family company, the capital in which belonged to a father and his two elder sons. After the death of the father leaving his shares to his younger sons and appointing them his executors, his elder sons, exercising the powers given to directors by the articles, refused to register the executors as shareholders and dismissed them from employment. The executors' petition for winding up of the company was dismissed. My Lords, with respect for the eminent judge who decided it, I must doubt the correctness of this. Whether on the facts stated a case of justice and equity was made out is no doubt partly a question of fact on which, even though my own view is clear enough, I should respect the opinion of the trial judge; but, this matter apart, I am unable to agree as to the undue emphasis he puts on the contractual rights arising from the articles, over the equitable principles which might be derived from partnership law, for in the result the latter seem to have been entirely excluded in the former's favour. I think that the case should no longer be regarded as of authority.

There are three recent cases which I should mention since they have figured in the judgments below In re Lundie Brothers Ltd. [1965] 1 W.L.R. 1051 was, like the present, a decision of Plowman J. This was a case where the petitioner, one of three shareholders and directors, was excluded from participation in the management and from directors' remuneration. Plowman J. applying partnership principles made a winding up order under the just and equitable clause. If that decision was right it assists the present appellant. The Court of Appeal in the present case disagreed with it and overruled it, in so far as it related to a winding up. The respondent argues that this was the first case where exclusion of a working director, valid under the articles, had been treated as a ground for winding up under the just and equitable clause and that as such it was an unjustifiable innovation.

In re Expanded Plugs Ltd. [1966] 1 W.L.R. 514 was, on the other hand, approved by the Court of Appeal in the present case. The case itself is a paradigm of obscure forensic tactics and, as such, of merely curious interest; its only importance lies in the statement, contained in the judgment, at p. 523, that since the relevant decisions were carried out within the framework of the articles the petitioner must show that they were not carried out bona fide in the interests of the company. I shall return, in so far as it limits the scope of the just and equitable provision, to this principle but I should say at once that I disagree with it.

In In re K/9 Meat Supplies (Guildford) Ltd. [1966] 1 W.L.R. 1112 there was a company of three shareholder/directors one of whom became bankrupt; the petitioner was his trustee in bankruptcy. It was contended that the company was a quasi-partnership and that since section 33 of the Partnership Act 1890 provides for dissolution on the bankruptcy of one of the partners a winding up order on this ground should be made. Pennycuick J. rejected this argument on the ground that, since the "partnership" had been transformed into a company and since the articles gave no automatic right to a winding up on bankruptcy, bankruptcy of one member was not a ground for winding up of itself. He then proceeded to consider whether the just and equitable provision should be applied. In my opinion, this procedure was correct and I need not express an opinion whether, on the facts, it was right to refuse an order.

Finally I should refer to the Scottish case of Lewis v. Haas, 1970 S.L.T. (Notes) 67 where the two main shareholder/directors each held 49 per cent. of the shares, the remaining 2 per cent. being held by a solicitor. Lord Fraser, in the Outer House, while accepting the principle that exclusion from management might be a ground for ordering a winding up, did not find the facts sufficient to support the use of the just and equitable clause.

This series of cases (and there are others: In re Davis & Collett Ltd. [1935] Ch. 693; Baird v. Lees, 1924 S.C. 83; Elder v. Elder & Watson, 1952 S.C. 49; In re Swaledale Cleaners Ltd. [1968] 1 W.L.R. 1710; In re Fildes Bros. Ltd. [1970] 1 W.L.R. 592; In re Leadenhall General Hardware Stores Ltd. (unreported), February 4, 1971, amounts to a considerable body of authority in favour of the use of the just and equitable provision in a wide variety of situations, including those of expulsion from office. The principle has found acceptance in a number of Commonwealth jurisdictions. Though these were not cited at the Bar I refer to some of them since they usefully illustrate the principle which has been held to underlie this jurisdiction and show it applicable to exclusion cases. In In re Straw Products Pty. Ltd. [1942] V.L.R. 222 Mann C.J. said, at p. 223:

In re Wondoflex Textiles Pty. Ltd. [1951] V.L.R. 458 was a case where again the company was held to resemble a partnership. The petitioner, owner of a quarter share, was removed from office as director by the governing director exercising powers under the articles. Thus the issue, and the argument, closely resembled those in the present case. The judgment of Smith J. contains the following passage, at p. 467:

The whole judgment is of value. In New Zealand, the Court of Appeal has endorsed the potential application of the principle to exclusion cases: Tench v. Tench Bros. Ltd. [1930] N.Z.L.R. 403; see also In re Modern Retreading Co. Ltd. [1962] E.A. 57, also a case of exclusion from management, and cf. In re Sydney and Whitney Pier Bus Service Ltd. [1944] 3 D.L.R. 468 and In re Concrete Column Clamps Ltd. [1953] 4 D.L.R. 60 (Quebec).

My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words "just and equitable" and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to "quasi-partnerships" or "in substance partnerships" may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words "just and equitable" sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in. My Lords, this is an expulsion case, and I must briefly justify the application in such cases of the just and equitable clause. The question is, as always, whether it is equitable to allow one (or two) to make use of his legal rights to the prejudice of his associate(s). The law of companies recognises the right, in many ways, to remove a director from the board. Section 184 of the Companies Act 1948 confers this right upon the company in general meeting whatever the articles may say. Some articles may prescribe other methods: for example, a governing director may have the power to remove (compare In re Wondoflex Textiles Pty. Ltd. [1951] V.L.R. 458). And quite apart from removal powers, there are normally provisions for retirement of directors by rotation so that their re-election can be opposed and defeated by a majority, or even by a casting vote. In all these ways a particular director-member may find himself no longer a director, through removal, or non-re-election: this situation he must normally accept, unless he undertakes the burden of proving fraud or mala fides. The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved. And the principles on which he may do so are those worked out by the courts in partnership cases where there has been exclusion from management (see Const v. Harris (1824) Tur. & Rus. 496, 525) even where under the partnership agreement there is a power of expulsion (see Blisset v. Daniel (1853) 10 Hare 493, Lindley on Partnership, 13th ed. (1971), pp. 331, 595).

I come to the facts of this case. It is apparent enough that a potential basis for a winding up order under the just and equitable clause existed. The appellant after a long association in partnership, during which he had an equal share in the management, joined in the formation of the company. The inference must be indisputable that he, and Mr. Nazar, did so on the basis that the character of the association would, as a matter of personal relation and good faith, remain the same. He was removed from his directorship under a power valid in law. Did he establish a case which if he had remained in a partnership with a term providing for expulsion, would have justified an order for dissolution? This was the essential question for the judge. Plowman J. dealt with the issue in a brief paragraph in which he said [1970] 1 W.L.R. 1378, 1389:

Reading this in the context of the judgment as a whole, which had dealt with the specific complaints of one side against the other, I take it as a finding that the respondents were not entitled, in justice and equity, to make use of their legal powers of expulsion and that, in accordance with the principles of such cases as Blisset v. Daniel, 10 Hare 493, the only just and equitable course was to dissolve the association. To my mind, two factors strongly support this. First, Mr. Nazar made it perfectly clear that he did not regard Mr. Ebrahimi as a partner, but did regard him as an employee. But there was no possible doubt as to Mr. Ebrahimi's status throughout, so that Mr. Nazar's refusal to recognise it amounted, in effect, to a repudiation of the relationship. Secondly, Mr. Ebrahimi, through ceasing to be a director, lost his right to share in the profits through directors' remuneration, retaining only the chance of receiving dividends as a minority shareholder. It is true that an assurance was given in evidence that the previous practice (of not paying dividends) would not be continued, but the fact remains that Mr. Ebrahimi was henceforth at the mercy of the Messrs. Nazar as to what he should receive out of the profits and when. He was, moreover, unable to dispose of his interest without the consent of the Nazars. All these matters lead only to the conclusion that the right course was to dissolve the association by winding up.

I must deal with one final point which was much relied on by the Court of Appeal. It was said that the removal was, according to the evidence of Mr. Nazar, bona fide in the interests of the company; that Mr. Ebrahimi had not shown the contrary; that he ought to do so or to demonstrate that no reasonable man could think that his removal was in the company's interest. This formula "bona fide in the interests of the company" is one that is relevant in certain contexts of company law and I do not doubt that in many cases decisions have to be left to majorities or directors to take which the courts must assume had this basis. It may, on the other hand, become little more than an alibi for a refusal to consider the merits of the case, and in a situation such as this it seems to have little meaning other than "in the interests of the majority." Mr. Nazar may well have persuaded himself, quite genuinely, that the company would be better off without Mr. Ebrahimi, but if Mr. Ebrahimi disputed this, or thought the same with reference to Mr. Nazar, what prevails is simply the majority view. To confine the application of the just and equitable clause to proved cases of mala fides would be to negative the generality of the words. It is because I do not accept this that I feel myself obliged to differ from the Court of Appeal.

I would allow the appeal and restore the judgment of Plowman J. I propose that the individual respondents pay the appellant's costs here and in the Court of Appeal.

VISCOUNT DILHORNE.

My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Wilberforce. I agree with all he has said, and he has dealt with the matter so comprehensively that there is nothing I wish to add. I agree that the appeal should be allowed and that the individual respondents should be ordered to pay the appellant's costs here and in the Court of Appeal.

LORD PEARSON. My Lords, I have had the advantage of reading the opinion of my noble and learned friend Lord Wilberforce, and for the reasons given by him I would allow the appeal and restore the judgment of Plowman J. I agree that the individual respondents should be ordered to pay the appellant's costs here and in the Court of Appeal.

LORD CROSS OF CHELSEA. My Lords, the "just and equitable" clause first appeared in section 5 of the Joint Stock Companies Winding Up Act 1848.

Subsections (1) to (6) of that section gave the court jurisdiction to wind up a company in various circumstances indicative of insolvency; subsection (7) gave jurisdiction if the company had been dissolved or should have ceased to carry on business or should be carrying on business only for the purpose of winding up its affairs; and subsection (8) added: "or if any other matter or thing shall be shown which, in the opinion of the court, shall render it just and equitable that the company should be dissolved."

The meaning of the subsection was considered by Lord Cottenham L.C. in 1849 in Ex parte Spackman, 1 Mac. & G. 170. In that case the company, which was a cattle insurance company, was not insolvent and was carrying on business; but the petitioners who held shares which were not fully paid up considered that its prospects were bad and that it might well become insolvent. The fact that some shareholders in a company take a pessimistic view of its prospects does not make it "just and equitable" to wind it up against the wishes of the majority who take a more optimistic view and it is not surprising that the petition was dismissed; but in the course of his judgment Lord Cottenham L.C. expressed an opinion as to the scope of the subsection which had for many years an unfortunate influence on the practice of the Companies Court. He said, at p. 174:

It is not in fact easy to see what precisely Lord Cottenham L.C. had in mind - for there may well be matters arising in the management of a company's affairs which make it "just and equitable" that it should be wound up but which have no relation whatever either to insolvency or a cessation of business. Nevertheless, when the subsection reappeared as section 79 (5) of the Companies Act 1862 the courts, with Lord Cottenham L.C.'s words "ejusdem generis" in mind, for many years interpreted it very narrowly and only made orders under it if the substratum of the company had disappeared or it was a "bubble" company which had never had a genuine substratum at all. Towards the end of the century the idea that the "just and equitable" clause only covered situations which could be said to be somehow "ejusdem generis" with the situations envisaged in the preceding subsections was gradually given up, but even in recent times judges have displayed a certain unwillingness to take the words at their face value and to apply them to new situations, which may well be an unconscious reflection of the restrictive interpretation which was put on them for so many years. In the present century, when the subsection became in turn section 129 (6) of the Companies (Consolidation) Act 1908, section 168 (6) of the Companies Act 1929 and section 228 (f) of the Act of 1948, petitions brought under it have generally related to disputes between rival shareholders or groups of shareholders in private companies; and in many cases the parties to the dispute have stood to one another in a relationship analogous to that of partners in an unincorporated business. In some of the reported cases in which winding up orders have been made those who opposed the petition have been held by the court to have been guilty of a "lack of probity" in their dealings with the petitioners. Thus in Loch v. John Blackwood Ltd. [1924] A.C. 783 the managing director and majority shareholder was deliberately keeping the minority in ignorance of the company's financial position in order to acquire their shares at an undervalue, and in In re Davis & Collett Ltd. [1935] Ch. 693 the holder of half the shares had used his casting vote as chairman in order to bring in an additional director who would vote as he wished and then proceeded to oust the owner of the other half of the shares from any participation in the management of the company's business. But it is not a condition precedent to the making of an order under the subsection that the conduct of those who oppose its making should have been "unjust or inequitable." This was made clear as early as 1905 by Lord M'Laren in his judgment in Symington v. Symington's Quarries Ltd., 8 F. 121, 130.

To the same effect is the judgment of Lord Cozens-Hardy M.R. in in re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426, 431-432. It is sometimes said that the order in that case was made on the ground of "deadlock." That is not so. As Mr. Frank Russell K.C., who was counsel for the appellant, pointed out, although Mr. Rothman and Mr. Weinberg were not on speaking terms they communicated through third parties, the company's business was flourishing and the articles contained a provision for arbitration to which resort could be had in the event of their failing to agree on any point. The reason why the petitioner succeeded was that the court thought it right to make the order which it would have made had Mr. Rothman and Mr. Weinberg been carrying on business under articles of partnership which contained no provision for dissolution at the instance of either of them. People do not become partners unless they have confidence in one another and it is of the essence of the relationship that mutual confidence is maintained. If neither has any longer confidence in the other so that they cannot work together in the way originally contemplated then the relationship should be ended - unless, indeed, the party who wishes to end it has been solely responsible for the situation which has arisen. The relationship between Mr. Rothman and Mr. Weinberg was not, of course, in form that of partners. They were equal shareholders in a limited company; but the court considered that it would be unduly fettered by matters of form if it did not deal with the situation as it would have dealt with it had the parties been partners in form as well as in substance.

The "just and equitable" clause is, as I see it, an equitable supplement to the common law of the company which is to be found in the memorandum and articles; but there are some reported decisions which I find difficult, if not impossible, to square with this view. The most notable of these is that of Simonds J. in In re Cuthbert Cooper & Sons Ltd. [1937] Ch.392. The company there was a private company founded in 1913 to take over the business then being carried on by a father and his two elder sons. The capital was #10,000 divided into #1 shares of which 5,000 were held by the father and 2,500 each by the two sons. The three of them were the directors of the company. In 1930 the father died having appointed his three younger sons who were employed by the company his executors and having bequeathed them his shares equally. The articles gave the directors an absolute discretion to refuse to register as members any person to whom a member executed a transfer of shares or any person who became entitled to shares by transmission on the death of a member. Such a person had a right to receive any dividends declared on his shares and a right to share in the surplus assets on a winding up, but no right to attend meetings or to receive accounts. No share could be transferred either by a member or by a person entitled by transmission to a person not a member so long as a member was prepared to buy them at a price based on the average rate of dividends over the preceding three years. After the father's death the younger sons asked their brothers - now the sole directors - to register them as members but they refused to do so. Dividends were, however, declared and the younger sons - though not entitled to them as of right - received copies of the accounts. In 1936 dissensions arose. The younger sons were dismissed from their employment; the dividend payable for the year ending June 30, 1936, was reduced; and the directors refused to supply them with the balance sheet for that year. The directors offered to buy their brothers' shares but only at a price which, so the younger brothers alleged, was far below their real value. In view of the right of the directors to refuse to register transfers a sale to an outsider was not possible. In these circumstances the younger sons petitioned to have the company wound up. They did not complain that they had no share in the management of the company but simply that they were not put on the register, the suggestion being that the directors were trying to force them to sell their half interest in the company at an undervalue by reducing the rate of dividend and refusing to let them see the accounts. In dismissing the petition the judge said that, although he must be guided by the principles applied by the court in deciding whether or not to dissolve a partnership, even in a partnership case the court would be guided by the partnership articles which one must in this case assume to correspond - mutatis mutandis - with the articles of the company. He also said that he was not prepared to assume that the directors were not acting in good faith in refusing to register the executors as shareholders and he refused to order them to attend for cross-examination. In effect he simply applied the common law, as laid down in the company's constitution and told the petitioners that if they wished to impugn their brothers' good faith they must prove their case by bringing an action against them. One naturally hesitates to dissent from any decision of Lord Simonds; but I cannot help thinking that on this occasion he took too narrow a view. It is not right to say that in a partnership case the court is tied by the terms of the partnership articles, for it will decree a dissolution of a partnership for a fixed term if it is "just and equitable" to do so. Further, he appears to have taken no account of the fact that the petitioners had made out a prima facie case against their brothers. Of course, the directors might have been able to show that they had respectable reasons for refusing to register their brothers as members and were not in the least influenced by any wish to induce them to sell their shares to them at a price which might be less than their true value; but on the undisputed facts it was for them to establish their good faith. The proper way to deal with the case would, I venture to think, have been to say that if the directors did not wish to give evidence and submit to cross-examination the company would have to be wound up. It is to be observed that the judge himself said that he had found the case a difficult one and in In re Swaledale Cleaners Ltd. [1968] 1 W.L.R. 1710 Danckwerts L.J. expressed the view that it was wrongly decided. It is true that in the earlier case of Charles Forte Investments Ltd. v. Amanda [1964] Ch. 240 the Court of Appeal - of which Danckwerts L.J. and I myself were members - had accepted the Cuthbert Cooper decision as correct, but it was not in any way necessary for our decision in that case to approve it and I think that we were wrong to do so.

What the minority shareholder in cases of this sort really wants is not to have the company wound up - which may prove an unsatisfactory remedy - but to be paid a proper price for his shareholding. With this in mind Parliament provided by section 210 of the Companies Act 1948 that if a member of a company could show that the company's affairs were being conducted in a manner oppressive to some of the members including himself, that the facts proved would justify the making of a winding up order under the "just and equitable" clause but that to wind up the company would unfairly prejudice the "oppressed" members the court could (inter alia) make an order for the purchase of the shares of those members by other members or by the company. To give the court jurisdiction under this section the petitioner must show both that the conduct of the majority is "oppressive" and also that it affects him in his capacity as a shareholder. Mr. Ebrahimi was unable to establish either of these preconditions. But the jurisdiction to wind up under section 222 (f) continues to exist as an independent remedy and I have no doubt that the Court of Appeal was right in rejecting the submission of the respondents to the effect that a petitioner cannot obtain an order under that subsection any more than under section 210 unless he can show that his position as a shareholder has been worsened by the action of which he complains. The facts of this case are set out in detail in the judgment of Plowman J. and I need not repeat them. The essence of the matter is that Mr. Nazar and Mr. Ebrahimi had been carrying on business as partners at will in equal shares; that the business was transferred to the company in which each had 40 per cent. of the capital and Nazar's son George the remaining 20 per cent.; that it was not contemplated that any dividends would be paid but that the profits of the company should be distributed by way of director's fees; and that the result of Mr. Ebrahimi's removal from the directorship was that instead of his having a share in the management of the business and an income of some #3,000 a year he was excluded from the management and deprived of any share in the profits save such dividend as might be paid on his shares if the Nazars thought fit to declare a dividend. The Court of Appeal held that Mr. Ebrahimi could not obtain a winding up order under the "just and equitable" clause unless he could show that the Nazars had not exercised the power to remove him from his directorship "bona fide in the interest of the company" or that their grounds for exercising the power were such that no reasonable man could think that the removal was in the interest of the company. With all respect to them I cannot agree that this is an appropriate test to apply. If one assumes that the company is going to remain in existence it may very well be that a reasonable man would say that it was in the interest of the company that Mr. Ebrahimi should cease to be a director. "These two men," he might say, "are hopelessly at loggerheads. If the business is to prosper one or other must go and the company is likely to do better without Mr. Ebrahimi than without Mr. Nazar." But these considerations have not, to my mind, anything to do with the question whether in the circumstances it is right that the company should continue in existence if Mr. Ebrahimi wishes it to be wound up. The argument upon which counsel for the respondent chiefly relied in support of the decision of the Court of Appeal was quite different. Mr. Ebrahimi, he said, consented to the conversion of the partnership into a limited company. Even though he became, because George Nazar was taken in, only a minority shareholder he could have safeguarded his position by procuring the insertion in the articles of a provision "weighting" the voting power of his shares on any question touching his retention of office as director: see Bushell v. Faith [1970] A.C. 1099. He must, therefore, be taken to have accepted the risk that if he and Mr. Nazar fell out he would be at Mr. Nazar's mercy. There might be force in this argument if there was any evidence to show that the minds of the parties were directed to the point; but there is no such evidence and the probability is that no one gave a moment's thought to the change in relative strength of their respective positions brought about by the conversion of the partnership into a company. It was not suggested that Mr. Ebrahimi had been guilty of any misconduct such as would justify one partner in expelling another under an expulsion clause contained in partnership articles. All that happened was that without one being more to blame than the other the two could no longer work together in harmony. Had no company been formed Mr. Ebrahimi could have had the partnership wound up and though Mr. Nazar and his son were entitled in law to oust him from his directorship and deprive him of his income they could only do so subject to Mr. Ebrahimi's right to obtain equitable relief in the form of a winding up order under section 222 (f). I would, therefore, allow the appeal. In conclusion, I would refer briefly to three recent decisions under paragraph (f). In re Lundie Brothers Ltd. [1965] 1 W.L.R. 1051 was, like this, an "exclusion" case. Plowman J. was I think right in that case, as in this, to make a winding up order. In In re K/9 Meat Supplies (Guildford) Ltd. [1966] 1 W.L.R. 1112 the company had an issued share capital of 11,001 shares 3667 of which were held by each of three men who were the sole directors and each of whom took part in the running of the business. It was arranged between them that the profits should be divided equally by way of director's fees. One of the three, a Mr. Darrington, got into financial difficulties. He resigned his directorship in January 1965, and in April was adjudicated bankrupt. Shortly afterwards the two remaining directors sold the business for #18,000 and placed the purchase price on deposit.

They offered to buy Mr. Darrington's shares from his trustee in bankruptcy at par but the trustee, taking the view that Mr. Darrington ought to receive a third share of the purchase price, petitioned under section 222 (f). Pennycuick J. came with regret to the conclusion that he must dismiss the petition. He thought it deplorable that the two other quasi-partners should retain in their hands assets to which Mr. Darrington's creditors were in common fairness entitled but he held that as the three had elected to trade together through the medium of a company instead of as partners there was no ground on which he could properly make the order. In coming to this conclusion he was, I think, much influenced by In re Cuthbert Cooper & Sons Ltd. [1937] Ch. 392. I think that a winding up order should have been made since in the absence of any other explanation the inevitable inference was that the two remaining directors in resisting a winding up and distribution of the surplus assets among the shareholders were putting pressure on the trustee in bankruptcy to sell them Mr. Darrington's shares at an undervalue. The last case is the unreported decision of Brightman J. in In re Leadenhall General Hardware Stores Ltd (unreported), February 4, 1971. His decision not to make a winding up order was, I think, justifiable - though I cannot agree with the reasons which he gave for it. If the respondents were telling the truth - and the judge held that they were -the almost inevitable inference was that the petitioner had been stealing the company's money. A petitioner who relies on the "just and equitable" clause must come to court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue. But the judge dealt with the case on the footing that the respondents' loss of confidence in the petitioner might have been due to a tragic and inexplicable misunderstanding. If it was right in the light of the evidence to deal with this case on that basis then I would have thought that a winding up order should have been made. I agree with the order proposed by my noble and learned friend Lord Wilberforce with regard to costs.

LORD SALMON.

My Lords, I concur and would allow the appeal. I agree that the individual respondents should be ordered to pay the appellant's costs here and in the Court of Appeal.

ORDER

Appeal allowed.

Second and third respondents to pay appellant's costs in House of Lords.

Legal aid taxation of appellant's costs in House of Lords.