27/08/2014

In a recent Federal Court case, the Court ordered the appointment of a liquidator over a company even though neither of the two feuding groups of shareholders wanted it.

The shareholders had in fact claimed against one another for damages but the court decided that the better course was to wind the company up – much to the chagrin of the company's owners.

This case involved a company that was originally operated by two people.  The company needed an injection of funds and entered into a Heads of Agreement with another party whereby that new party took a 50% share in the business and appointed 1 of 2 directors for the company.

After a period the two parties began to disagree on the direction of the company.

The disagreement led to the commencement of court proceedings and allegations of diverting common business opportunities, breach of directors' duties, misleading or deceptive conduct and breach of restraints.  The parties became deadlocked on the management of the company and the business relationship had irretrievably broken down.

The Court noted that the business relationship "had to be dissolved" as the parties focussed their attention on who was at fault in lengthy and costly court proceedings rather than on how to achieve an outcome for the company.

A significant part of the allegations related to claims and counter claims that each party had engaged in "oppressive conduct" against the other party.  

The Court held that the test for oppression had to be decided objectively by reviewing the facts rather than by looking at the motives of the parties or the effect on them.  It said:

"The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material."

The Court ultimately held that each party had engaged in oppressive conduct.  The Court determined an appropriate order considering the conduct of both parties was to order the winding up of the company even though both parties opposed the making of such an order.  The Court's reasoning included:

"Both parties had opposed the making of an order that [the company] be wound up. However, in our opinion such an order is, unless the parties can arrive at a commercial resolution, the only order that was, and is, appropriate given the deadlock and existence of the mutually oppressive conduct that we have found, and the primary judge should have found. A liquidator will be able to investigate any remedies that the company may have against any of the parties in all of the circumstances."

Further, the Court suggested that as each party had opposed an order for winding up they should be given time (1 week) to "explore a commercial resolution" failing which the order for winding up would be given effect.

The message from this case is that where there are claims and counter claims about the conduct of shareholders and directors, the Court may order a winding up even though neither party has requested such an order.  

The consequence is that a liquidator may be appointed and they can investigate all the company dealings and the conduct of all parties involved in the company's management to determine if there have been any breaches, what loss has been suffered by the company, and what action should be taken against the offending parties.

Once a liquidator gets their hands on a company, you can effectively kiss goodbye to any prospect of a material distribution from the company.

If you have any questions regarding the conduct of shareholders and/or directors, please call us on (02) 8296 6222.