Toxic shareholder relationship may lead to liquidation

The word “liquidation” is often associated with a company that is bankrupt, struggles to pay salaries and cannot pay its creditors. However, a perfectly solvent company, where there is a toxic relationship between its shareholders, may be liquidated on the basis that it is “just and equitable” to do so.

8 Sep 2021 3 min read Business Rescue Restructuring & Insolvency Newsletter Article

At a glance

  • A solvent company can be liquidated if there is a toxic relationship between shareholders, even if the company is financially stable.
  • Grounds for liquidation include deadlock among directors or shareholders resulting in irreparable harm to the company, failure to elect successors to directors in consecutive annual general meetings, or if it is deemed just and equitable to do so.
  • The case of Noble Land (Pty) Ltd highlights how a family feud between two brothers led to the liquidation of the solvent family business, as their toxic and dysfunctional relationship made it impossible for the company to function.

The grounds on which a court may liquidate a solvent company include (but are not limited to): where the directors are deadlocked in the management of the company and the shareholders are unable to break the impasse, resulting in irreparable harm to the company; where shareholders are deadlocked in voting power, and have failed in at least two consecutive annual general meetings to elect successors to directors who’s terms have expired; and where it is just and equitable for the company to be liquidated.

Recently, in Barbaglia N.O and Others v Noble Land (Pty) Ltd and Others (A5041/2020) [2021] ZAGPJHC 85 (24 June 2021), the court placed Noble Land (Pty) Ltd in liquidation on the basis that it was just and equitable to do so. This is a reminder of how a family company, with noble begins, can be caught in the middle of a family feud which leads to the company’s tragic liquidation demise. That company is Noble Land.

Noble Land is a solvent family business, owned by two brothers through their respective trusts. Their parents are no longer involved in the affairs of Noble Land, however, both brothers are involved in a family feud, which appears to have affected their roles as shareholders of Noble Land. Settlement and mediation attempts to resolve their dispute were not successful, thus the relationship between the two brothers is “toxic and dysfunctional on a professional and personal level”. Eventually, one of the brothers brought an application to liquidate Noble Land.

The court laid down the following principles in relation to the liquidation of a company on the basis that it is just and equitable to do so:

  • the court has an overall discretion to liquidate a solvent company where there is a general breakdown of the relationship between shareholders;
  • the court exercises this discretion after applying the law, justice and equity to the facts of the company in question;
  • even in an instance where there is a failure of the relationship between shareholders to a point where shareholders have been unable to elect successors to directors in one AGM, a court may exercise its discretion and liquidate the company;
  • there exists between shareholders a particular personal relationship of confidence and trust similar to that which exists between partners in a partnership. If one of the shareholders destroys that relationship, the other shareholder is entitled to claim that it is just and equitable for the company to be liquidated;
  • it is not necessary that the shareholder seeking the liquidation should have the proverbial “clean hands” in the feud between the shareholders. In many instances, both shareholders would, to some extent, have contributed to the breakdown in their relationship.

The court found there was a complete breakdown in the brothers’ relationship, which made Noble Land unable to function. There was no reasonable hope of “tiding over the period of conflict and of Noble Land emerging as a functioning company”. The brothers were “hopelessly at loggerheads” with each other. Noble Land was in a state which could not have been contemplated when it was formed, and the way forward appears to be more and more litigation between the brothers. Hence the disputes between the brothers have reached a level where it would be just and equitable to liquidate Noble Land.

It is reasonably acceptable for shareholders to debate and disagree on commercial aspects of a company. However, if their relationship breaks down to a point where it is toxic, then that may be a basis for a court to liquidate an otherwise solvent company.

The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2024 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us