Can a company be wound up under s 461K for failing to achieve its objectives?

The recent New South Wales Supreme Court (NSWSC) case In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98 (Gearhouse) provides further guidance on the Court’s power to wind up a company under section 461(1)(k) of the Corporations Act 2001 (Cth) (Act).  This article discusses Gearhouse and how it applies section 461(1)(k).

When can the Court wind up a company?

Section 461(1)(k) of the Act states:

(1) The Court may order the winding up of a company if…

(k) the Court is of opinion that it is just and equitable that the company be wound up.”

The case In the matter of Catombal Investments Pty Ltd [2012] NSWSC 775 (Catombal) per Brereton J at [19] recognised section 461(1)(k) as conventionally applicable to cases where:

  • the substratum of the company has failed;
  • management of the company’s affairs are in deadlock or disagreement;
  • the company’s formation involved fraud;
  • there has been misconduct on behalf of the company’s directors;
  • there is ‘constitutional or administrative vacuum’ in the company’s management; and
  • there is a lack of public interest, fairness, confidence and commercial morality.

The case of In the matter of CNPR Limited [2018] NSWSC 989 (CNPR) per Black J at [9] said:

“…an order for a company to be wound up on the just and equitable ground may be appropriate is where it is impossible to carry on the company’s business because the “substratum of the company” has failed or, in other words, it has become impossible for the company to achieve the purpose for which it was formed.”[1]

Brereton J states in Catombal at [20] that the Court is not restricted to these scenarios as the term just and equitable is broad and a party may seek an order under section 461(1)(k) whenever something:

“…[affecting] him or her in [their] relations with the company or shareholdings… at least so long as those circumstances have a direct and immediate relationship to, or bearing upon, the management or administration of the affairs of the subject company, or the conduct of its business…”[2]

Background facts in Gearhouse

On the 26 February 2016, Broadcast Sports International, LLC EIN 52-1977327 (BSI) and Gravity Media (Australia) Pty Ltd ACN 081 039 401 (GMA) both invested in an incorporated joint venture known as Gearhouse BSI Pty Ltd ACN 610 164 102 (GBSI).[3]  Each company held 50% of shares in GBSI.[4]  On the same date of incorporation, GBSI and V8 Supercars Australia Pty Ltd ACN 077 053 484 (V8 Supercars) entered the Television Production Services (In-Car Camera Systems) Agreement (TPSA) to deliver in-camera systems for the V8 Supercars Race Series over a five (5) year fixed term, expiring the 31 December 2020 (Expiry).[5]  BSI and GMA, despite otherwise being competitors, would transfer to GBSI the equipment required to execute the TPSA.[6]

Clause 23.3 of the TPSA discussed termination:

23.3. Termination upon non-renewal or termination of TPSA

In the event that the TPSA is terminated by any party to that agreement during its current term or the TPSA is not renewed beyond the end of [the Expiry] the Shareholders will meet to discuss whether or not to terminate this Agreement, and how the assets and liabilities of GBSI should treated upon such termination.”[7]

Additionally, clause 5.9 of the TPSA states that each party had the right to purchase back the equipment they had provided to the GBSI at fair market value in the event of termination.[8]

In the months leading up to the Expiry, V8 Supercars wrote to GBSI expressing wishes to extend the TPSA (V8 Offer).[9]  However, BSI notified GMA and GBSI they will cease the provision of services required under the TPSA upon the Expiry.[10]  Additionally, BSI expressed resistance to renewing the TPSA because of:

  • insufficient return on investment; and
  • GBSI growth projections being limited.[11]

BSI also stated intentions of buying back their equipment at fair market value per clause 5.9 of the TPSA and opened a line of communication between the companies to discuss obligations under clause 23.3.[12]

Conversely, GMA supported the V8 Offer and intended to continue its investment in GBSI.[13]  This resulted in a deadlock over the fate of GBSI (Deadlock).  Additionally, GMA deployed BSI equipment to various racing teams around Australia in preparation of the 2021 V8 Supercars season after the Expiry.[14]  GMA did not specify the location of this equipment until required by law.[15]  BSI sought an order to wind up GBSI under section 461(1)(k) of the Act ultimately allowing them to buy back the equipment at fair market value.

BSI’s Submissions

Per Williams J at [187], consistent with the first Catombal scenario, BSI submitted:

…that GBSI’s business ceased and its substratum failed when the TPSA expired on 31 December 2020 because GBSI was established for the limited purpose of the TPSA, the entire business function of GBSI was the TPSA, [which had] not been renewed and will not be renewed because BSI has decided not to agree to its renewal… “the purpose of GBSI, as an entity, had been exhausted.”

Additionally, the unauthorised deployment of equipment and subsequent cover of their location led to a complete breakdown of confidence and trust between BSI and GMA, consistent with Catombal scenarios two (2) and four (4).[16]

GMA’s Submissions

Per Williams J at [188], GMA submitted:

“…that the substratum had not failed because the “Business” of GBSI is not limited to the provision of in-car camera systems under the TPSA for the 2016-2020 season, but extends to the provision of those systems under any renewed TPSA. As a result of the [V8 Offer], GBSI has an opportunity to continue its business and the dispute resolution procedures under the Shareholders Agreement are available to deal with the present deadlock between shareholders as to whether GBSI should take up that opportunity.”

It was then for Williams J to decide whether the substratum of GBSI had failed despite their being an offer to renew the TPSA.[17]

Decision

Williams J at [228] stated that winding up is an extreme step and accepted GMA’s submission that GBSI has the potential to remain solvent with the V8 Offer.  Nonetheless, Williams J at [216]-[217] refers to GMA’s unauthorised deployment and subsequent refusal to disclose the location, until legally required to, of BSI equipment as:

… a complete breakdown in cooperation between GMA and BSI, and BSI is justified in having lost trust in GMA and lost confidence in the management of GBSI… [Therefore] the prospect of the shareholders resolving [the Deadlock] through the dispute resolution mechanisms of the Shareholders Agreement is fancifulThe [Deadlock] and conduct of GMA is frustrating the commercially viable and sensible operations of GBSI…”

Williams J ultimately accepted BSI’s submissions at [232]-[233]:

[h]aving regard to the breakdown in cooperation and trust between the shareholders, BSI’s justified loss of confidence in the management of GBSI, GMA’s conduct in deploying GBSI’s valuable equipment without authority and refusing to retrieve it, the deadlock that is incapable of resolution as a result of the loss of trust and confidence and the practical reality that these matters have brought about a failure of the substratum of GBSI, I am of the opinion that it would be just and equitable to wind up GBSI in the absence of any other remedy.”

(bold is our emphasis)

In summary, as the V8 Offer made achieving GBSI’s objectives still possible, the Expiry did not solely result to the incorporated joint venture being wound up.  However, it was a combination of Catombal scenarios one (1), two (2) and four (4) that made the Court be of the opinion that GBSI’s substratum had ultimately failed.  This was evident through:

  • GMA’s conduct;
  • BSI’s justified and genuine loss of confidence and trust in GMA’s management of GBSI;
  • as a result, the Deadlock being incapable of resolution; and
  • the Expiry with minimal certainty of renewal.

Therefore, Williams J at [244] ordered GBSI be wound up pursuant to section 461(1)(k) of the Act.

Takeaways

William J’s decision in Gearhouse highlights that circumstances where a company can be wound up under section 461(1)(k) are not merely black and white thresholds to be met.  It can be the case that multiple circumstances, individually not satisfying section 461(1)(k), can be intertwined to lead the Court to conclude that a company should be wound up.  Additionally, the facts of the case emphasize the dangers of entering into incorporated joint ventures with competitors where the likelihood for disagreement is reasonably high.

Links and further references

Related articles

Just and equitable winding up for shareholder oppression

Shareholder disputes – the fight for control

Top 7 mistakes made in Shareholders’ Agreements

Legislation

Corporations Act 2001 (Cth)

Cases

Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] 3 Qd R 520
Beck v Weinstock [2010] NSWSC 1068
Capel Finance Ltd [2005] NSWSC 286
Cic v Hannan [2001] NSWSC 437
Davis & Co Ltd v Brunswick (Aust) Ltd [1936] 1 All ER 299
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Federal Commissioner of Taxation v Coppleston [1981] FCA 166
Heesh v Baker [2008] NSWSC 711
In re Straw Products Pty Ltd [1942] VLR 222
In the matter of CNPR Limited [2018] NSWSC 989
In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98
In the matter of New South Wales Leagues’ Club Limited [2014] NSWSC 1610
Kandelka Management Pty Ltd v Pisces Group Ltd [2009] FCA 1379
Pacific Dairies Limited v Orican Pty Ltd [2019] VSC 647
Re Bleriot Manufacturing Aircraft Company Ltd (1916) 32 TLR 253
Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247
Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042
Re Nestor Pty Ltd (1981) 6 ACLR 114
Re Tivoli Freeholds Ltd [1972] VicRp 51
Wayde v New South Wales Rugby League (“Western Suburbs case”) [1985] HCA 68
Whitby Land Company Pty Ltd v Li, in the matter of Whitby Land Company Pty Ltd [2014] FCA 806

Further information

If you need advice on a shareholders dispute or whether there are grounds to wind up a company under section 461K, please contact me for a confidential and obligation free discussion:

Malcolm BurrowsMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013 (preferred)
Mobile: 0419 726 535
e: mburrows@dundaslawyers.com.au

 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] See also In the matter of New South Wales Leagues’ Club Limited [2014] NSWSC 1610, [59] (Brereton J); Cic v Hannan [2001] NSWSC 437, [9]-[13] (Barrett J); Re Tivoli Freeholds Ltd [1972] VicRp 51; Davis & Co Ltd v Brunswick (Aust) Ltd [1936] 1 All ER 299.
[2] See also In re Straw Products Pty Ltd [1942] VLR 222, 223 (Mann CJ); re Bleriot Manufacturing Aircraft Company Ltd (1916) 32 TLR 253, 255; Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 374; Re Nestor Pty Ltd (1981) 6 ACLR 114, 119 (Powell J).
[3] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [4].
[4] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [7].
[5] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [6].
[6] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [8]-[9].
[7] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [12]-[13].
[8] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [16].
[9] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [89].
[10] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [71], [93]-[94], [99]-[101].
[11] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [71], [93]-[94], [99]-[101].
[12] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [71], [93]-[94], [99]-[101].
[13] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [92], [95]-[98], [102]-[104].
[14] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [122], [208].
[15] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [122], [208].
[16] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [124]-[125], [135].
[17] In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98, [191].

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