Winding Up Order Where ‘Functional Deadlock’ Could Not be Broken
Winding up orders are not particularly common, not least because they are generally considered an order of last resort where there’s no other viable option for the company. A recent order for the winding up of a company came against the background of two directors who reached a deadlock that could not be broken.
The practical implications of a winding up order (compulsory liquidation) are significant: the business immediately ceases to operate, the inevitable instantaneous redundancies and the liquidating of assets to pay off creditors.
Where at all possible, the parties should work hard to resolve key issues before a winding up order becomes inevitable.
Winding up
Under s122(1) of the Insolvency Act 1986, the court can made a winding up order in circumstances, for instance that it is just and equitable that the company should be wound up; or that the company is unable to pay its debts.
An individual petitioning for a winding up order is required to show they will derive a tangible benefit from the winding up (usually that a distribution will be able to made to the members on liquidation).
What happened?
Peter Dosanjh and Victor Balendran were the co-directors and shareholders of Webb Estate Developments Ltd, which was incorporated in February 2018. The company had been in operation since 2011, originally as an LLP.
Webb owned around £6.85m worth of properties, the management work for which was largely carried out by Victor. Unfortunately, the relationship between the two deteriorated to the point where they differed fundamentally about how the business should operate. One of the key issues they disagreed on was whether their monthly £7,000 payments should be treated as directors' loan repayments to the company, or reimbursement of their expenses.
In August 2023, Peter petition for a winding up on the grounds because of the breakdown of the relationship of mutual trust and confidence between them; and on the basis of “functional deadlock”.
On the payments issue, the judge concluded that the payments could not be characterised as expenses and they were clearly not. They could, however, be considered directors' remuneration, dividends or repayments of the directors' loans to the company.
And even if they were to agree that the monthly payments were repayments of loans to the company - that would not have resolved the deadlock. Seeing the various communications between the two directors led the judge to concluded that attempts to resolve the issues were unsuccessful.
The court must not make a winding order if another remedy is available; and the petitioner is acting unreasonably in seeking a winding up order instead of pursuing that other remedy (s125(5)).
The judge came to the conclusion that in the circumstances, there was no realistic alternative other than winding up. Victor had no desire to purchase Peter’s share and the relationship between the two had so totally and irretrievably broken down they were unable to agree on fundamental company management matters.
There was also a functional deadlock. It was, the judge found, “entirely unsurprising” and not unreasonable that Peter had resorted to petitioning for the winding up of the Company.
1Dosanjh v Balendran [2025] EWHC 507 (Ch)
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