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Case of Ebrahimi vs Westbourne Galleries Ltd

In the case of Ebrahimi v Westbourne Galleries Ltd, the House of Lords considered passing off or a winding up order on ‘just and equitable’ ground under section 222 (f) of the Companies Act 1948 which section carried the statute before the introduction of section 122 of the Insolvency Act 1986. This is a case where there was an expulsion where a director claimed the right to take part in the management of the company and his expulsion from the management was not in conformity with the principles that all the directors should take part in the management on which the company was formed.

Judgment of Parker J in RE Guidezone Ltd: In the case of Guidezone Ltd Parker J mainly depended on the decisions in the case of O’Neill v Phillips in the judgment delivered by Lord Hoffmann and the judgment of Lord Wilberforce in the case of Ebrahimi v Westbourne Galleries Ltd. The O’Neill v Phillips case establishes that the test for ‘unfairness’ for the purposes of section 459 of the Companies Act depends on the whether the majority has acted or proposing to act in a contrary manner to good faith; and also that whether there was application

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of the just and equitable principles in the act or proposed act of the majority.

The ‘unfairness’ for the purpose of this section cannot be decided by referring to the subjective notions of fairness. In the case of quasi – partnerships it is an established principle that exclusion of the minority from the management of the company contrary to the original understanding among the parties on the basis of which the company was formed can be regarded as an act done in contrary to good faith as has been decided in the case of Ebrahimi v Westbourne Galleries Ltd.

As per the judgment of Lord Hoffman on which Parker J relied ‘unfairness’ has the following dimensions ‘Unfairness’ may arise from agreements or promises made, or understandings reached, during the life of the company which it would be unfair to allow the majority to ignore. Applying the traditional equity principles it is not possible to hold the majority the party to an agreement, promise or understanding that can not be enforced in law.

However if the minority has acted on the reliance of such agreement, promise or understanding then the majority can be held on such premises. ‘Unfairness’ for the purposes of s 459 may arise where an event occurs which puts an end to the basis upon which the parties entered into association with each other, ‘making it unfair that one shareholder should insist upon the continuance of the association’. Unfairness here arises on the insistence of the majority for the continuance of the association in the changed circumstances.

Because of the above observations and also on an analysis of the various claims made by the petitioner on the basis of the facts presented Parker J decided that there is no case for the petitioner which can be treated as having a ‘unfairly prejudicial ground’ necessitating the winding up of the company. Argument of Mr. Acton Q. C “The just and equitable jurisdiction to wind up quasi-partnership companies as exercised by the courts for well over a century is based upon the just and equitable principles developed in relation to the court’s just and equitable jurisdiction to dissolve partnerships.

As confirmed by the House of Lords in Westbourne Galleries, this means that in relation to such companies, if the conduct of the majority has been such that, were the company a partnership, it would be dissolved by the court under its just and equitable jurisdiction, then the court will equally order a winding up under such jurisdiction. That jurisdiction is clearly in some respects wider than the jurisdiction to grant relief in relation to unfair and prejudicial conduct under section 459 particularly as that jurisdiction has been interpreted by the House of Lords in O’Neill v Phillips….

Parker J’s decision contrary to the above proposition in Re Guidezone was accordingly, with respect, wrong”. (Steven Acton Q. C, (2001) 22 Co. Lawyer 134, 139) As per Mr. Acton once it is established that the company which is under consideration is a quasi – partnership, then there is no need to look in to the provisions of section 459 of the Companies Act to arrive at a just and equitable ground for winding up the company.

According to him the jurisdiction under s 122 supersedes the jurisdiction for granting of relief under s 459 of the Companies Act. In support of his claim he relies on the judgment in the case of Re R A Noble & Sons (Clothing) Ltd in which case although the petitioner had not established that there was an unfair prejudice, still a winding up order can be passed on just and equitable ground.

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