Friends and co-workers, David Wong and Eddy Ng, had long talked about owning a business together. In 2002, the pair took the plunge and purchased the Six Mile Pub (the Pub) just outside of Victoria. Unfortunately, as so often happens with business ventures between friends, the endeavour turned sour. The legal dispute that followed, recently considered by the BC Court of Appeal, expands the reach of liquidation orders. It also serves as yet another in a long list of reminders of the importance of shareholder agreements in closely held companies, that include clear provisions for ending a business relationship in the event of a breakdown of that relationship.
Background
David and Eddy incorporated Six Mile Pub Ltd. to acquire and operate the Pub, along with a holding company, Golden Spigot Pub Ltd. Despite agreeing to make equal capital contributions and being equal shareholders, Eddy was unable to raise his full contribution. David and his wife became owners of 54.5% of the voting shares with the rest owned by Eddy through his personal investment corporation. The capital shortfall was raised by issuing non-voting shares to a handful of other investors, including Eddy’s mother and pub employees.
The parties failed to enter into a shareholder agreement and made no provisions in the company’s articles to allow a shareholder to sell their shares for fair value in the event of a breakdown in the relationship.
Initially, both men were involved in the day-to-day management—David took care of operations while Eddy oversaw the kitchen. After just a couple of years, however, Eddy’s involvement waned as he dealt with substance abuse, health, and personal issues. Ultimately, David removed Eddy as director in 2014. Two years later, Eddy died.
Despite the strained relationship, the Pub prospered. The property value alone had increased over 200% since the purchase. Following Eddy’s death, his holding company, estate, and his mother’s estate (collectively, Eddy’s Group) sought a buy out of their shares. David offered a price only 11% above the original investment price. The offer was rejected and several years of further discussions failed to result in an agreement, leading Eddy’s Group to commence a petition under the Business Corporations Act (the Act).1 The petition alleged oppression or, in the alternative, sought a liquidation order under s. 324 of the Act.
The Petition Decision
Justice Saunders quickly rejected the oppression claim, finding that the petitioners’ only interest was in selling their shares. There was no evidence to support the assertion that they sought to be involved in the corporation.
The Court then considered whether it was “just and equitable” to order liquidation under s.324(1)(b) of the Act.2 Justice Saunders characterized Golden Spigot as a closely held company operating much like a partnership and applied the principles governing the dissolution of partnerships. Those principles permit dissolution where there has been:
1) a breakdown of the mutual trust and confidence upon which the original undertaking was founded;
2) a ‘destruction of mutual confidence’; or
3) a refusal to meet on matters of business, continued quarreling and such a state of animosity as precludes all reasonable hope of reconciliation and friendly cooperation.3
After reviewing extensive evidence, Justice Saunders concluded that there had been a partnership-like relationship despite the unequal capital investment. Further, there had been “a breakdown of the mutual trust and confidence upon which the original undertaking was founded” sufficient to warrant a liquidation order on the basis that it was just and equitable.4 Acknowledging that a liquidation order is a “draconian” remedy, the Court suspended the order for 90 days to allow the parties to negotiate a mutually agreeable sale price, should they choose to do so.5
The Appeal Decision
David appealed, alleging four errors on the part of the lower court:
1) a s. 324 liquidation order cannot be granted solely to allow shareholders to monetize their investment;
2) the evidence did not establish the requisite breakdown of mutual trust and confidence;
3) the petition was barred by the Limitation Act or the doctrine of laches; and
4) the judge failed to consider less draconian remedies.6
On the first ground, the Court grappled with its earlier decision in Weisstock v Weisstock, 2023 BCCA 352, which held that s. 324 “is not a mechanism to simply allow a minority shareholder ‘to monetize [their] investment.”7 The Court clarified that, while liquidation “is not a routinely available mechanism whenever a minority shareholder wishes to ‘cash in’ their investment”, it remains available where it is just and equitable.8 In companies intended to function as partnerships, the parties often reasonably expect liquidation to be available if the relationship irretrievably breaks down. Accordingly, a petitioner’s desire to realize the value of their investment does not, by itself, preclude a liquidation order.9
The Court also rejected David’s arguments that the corporate and shareholder structure prevented a finding of mutual breakdown noting that “to place technical roadblocks in the way of making an order under a provision that has as its very purpose the elimination of such impediments” would be to place the discretion under s. 324 into a “straitjacket”.10
On the limitation issue, the Court held that a petition pursuant to s. 324 is not a “claim” within the meaning of the Limitation Act.11 Section 324 does not create a cause of action or remedy for loss; rather, it empowers courts to intervene in corporate governance where it is equitable and just to do so.12 Laches, however, as an equitable doctrine, is applicable to a s. 324 petition. However, the Court of Appeal could find no error in Justice Saunders’ conclusion that the facts of this case did not amount to laches.
On the final ground of appeal, David advanced a twofold argument. First, he argued that the petitioners were free, under the corporation’s articles, to sell their shares on the open market provided they complied with the provision giving existing shareholders a right of first refusal. The Court rejected this argument. As Justice Saunders had found, any right to sell at fair market value was illusory because there was effectively no market for a minority interest in a closely held corporation that paid no dividends.13
However, the Court agreed with David’s second argument asserting that Justice Saunders should have considered the less drastic remedies available under the Act, particularly section 227(3), before ordering liquidation.14 The Court of Appeal gave David 30 days to elect to purchase the Eddy’s Group shares at fair value. If he chose to do so, the parties were directed to retain a business valuator to determine the company’s value.15
Key Takeaways
The decision arguably expands the practical reach of liquidation orders in corporate governance disputes between partners in closely held companies. A shareholder’s desire to realize the value of their investment is not a bar to liquidation where such an order would be just and equitable.
A shareholder seeking to leave the business does not need to prove that the parties originally intended a dissolution of the business if the relationship failed. The courts may infer that expectation from the partnership-like nature of the business.
Petitions for liquidation under s. 324 are not subject to the Limitation Act. Thus, a shareholder whose oppression claim may be vulnerable to a limitation defence may still be able to bring a liquidation petition.
The case serves as yet another in a long line of cautionary tales reminding those who enter into closely held business relationships of the importance of a carefully drafted shareholder agreement that sets out specific mechanisms for one shareholder to exit the business in a fair and efficient way in the event of the breakdown of the relationship.
For more information on the issues discussed in this article, or for assistance navigating a breakdown of a business relationship, please contact Joe Ensom.
2. Section 324(1) reads “On an application made in respect of a company […] by […] a shareholder of the company […] the court may order that the company be liquidated and dissolved if […] (b) the court […] considers it just and equitable to do so.”
3. Ten Hoeve v Beukens, 2020 BCSC 1194, at para. 46, citing Vivial v Firth, 2012 BCSC 517, at paras. 72-80.
6. Golden Spigot Pub Ltd. v Eddy Ng Management Services Ltd., 2026 BCCA 231.
9. At para. 56. The Court further clarified that specific evidence at to the business partners’ actual expectations at the time they formed the business was not necessary. It is open to the Court to assume what those expectations would have been given the surrounding circumstances.
11. RSBC 1996, c 266.
12. At para. 65. This is in contrast to oppression remedies which the Court affirmed are subject to the Limitation Act.
14. The remedies set out in section 227(3) include orders requiring the company to purchase a shareholder’s shares or requiring a shareholder to purchase the shares of another.