Just and Equitable Winding Up of a Corporation

Just and equitable winding up is a court order that dissolves a corporation and distributes its assets because continuing the business would be unfair or unjust to shareholders or stakeholders. It’s the corporate equivalent of ending a marriage that can no longer function.

Courts have the power to shut down a corporation when relationships have broken down so completely that the company can’t operate fairly, even if it’s technically profitable and legally compliant.

Courts only wind up corporations in serious circumstances where no other remedy will address the injustice.

Complete Breakdown of Trust: When shareholders can no longer work together and the relationship has deteriorated beyond repair. Constant conflict, inability to make decisions, or complete loss of confidence between shareholders may justify winding up.

Deadlock: Equal shareholders who fundamentally disagree on management can’t move forward. The corporation is paralyzed because no one has sufficient votes to make decisions, and compromise is impossible.

Exclusion from Management: A shareholder who reasonably expected to participate in management is completely frozen out, particularly in small corporations where shareholders expected active involvement.

Fraud or Misconduct: Serious fraud, dishonesty, or misconduct by those controlling the corporation makes it just and equitable to wind up rather than allow continued operation under their control.

Family Business Disputes: Family members who built a business together have irreparable falling out. They can’t work together, trust is gone, and continuing the business together is impossible.

50/50 Shareholder Deadlock: Two equal shareholders fundamentally disagree about the business direction. Neither can make decisions without the other, and they refuse to compromise. The corporation can’t function.

Minority Shareholder Exclusion: A minority shareholder invested expecting to work in the business and participate in management. Majority shareholders freeze them out completely, and buying out their shares isn’t feasible.

Once a court orders winding up, the corporation is dissolved in an orderly fashion.

Appointing a Liquidator: The court appoints someone to manage the winding-up process. The liquidator takes control of the corporation’s assets and operations.

Selling Assets: The liquidator sells the corporation’s assets – property, equipment, inventory, intellectual property – typically through public sale or auction.

Paying Debts: Proceeds first pay the corporation’s creditors. Secured creditors are paid first, then unsecured creditors, following legal priority rules.

Distributing Remainder: After all debts and liquidation costs are paid, remaining funds are distributed to shareholders according to their share ownership.

Final Dissolution: The corporation is formally dissolved and ceases to exist.

Courts view winding up as a last resort. Before ordering it, they consider whether other remedies could address the unfairness.

Buyout Orders: Ordering one shareholder to buy out the other preserves the business while ending the problematic relationship. This is often preferred over destroying a viable business.

Oppression Remedies: Courts can order various remedies to address unfair treatment without winding up the corporation, such as changing management, requiring information disclosure, or appointing supervisors.

Arbitration or Mediation: Sometimes courts encourage shareholders to resolve disputes through mediation before considering winding up.

The party seeking winding up must prove that it’s just and equitable to dissolve the corporation, no other remedy adequately addresses the injustice, and the problems are so serious that winding up is justified despite its drastic consequences.

This is a high bar. You need compelling evidence that the corporation truly cannot function fairly.

Well-drafted shareholder agreements often prevent winding-up applications by including buyout mechanisms, dispute resolution procedures, and clear governance structures.

If your agreement provides alternative remedies for deadlock or exclusion, courts will likely require you to use those remedies instead of ordering winding up.

Shareholders, directors, or in some cases creditors can apply for winding-up orders. However, the specific circumstances and jurisdiction determine who has standing to bring the application.

If you’re in a corporation with relationship problems, our litigators can assist. We have litigated hundreds of these cases. Contact us at 416.901.9984 or info@pintoshekib.ca.