Director’s misuse of funds held to be oppressive

Shareholder oppression usually occurs when a majority shareholder(s) misuses their power to oppress the minority shareholder(s).   The test for “oppression” is an objective one and is contained in Section 232 of the Corporations Act 2001 (Cth) (the Act).   For instance, where a director is found to have breached their fiduciary duty because they have misappropriated funds or assets this can be considered as being oppressive conduct.  This was the case in Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452 (Martin) when an executive director misappropriated and misused company funds and assets and was held to have breached his fiduciary duties.

So just what is shareholder oppression?

Section 232 of the Act sets out the grounds on which a Court may make an order under Section 233 if the conduct of the company’s affairs, an actual or proposed act or omission by or on behalf of a company or a resolution or proposed resolution is either:

• contrary to the interests of the members as a whole; or
• oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.

Who can bring an oppression claim?

Section 234 of the Act lists the persons entitled to apply for relief from oppression:

• a shareholder of the Company;
• a person who has been removed from the register of members because of a selective reduction;
• a person who has ceased to be a member of the Company if the application relates to the circumstances in which they ceased to be a member;
• a person to whom a share in the Company has been transmitted by will or by operation of law; or
• a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into the Company’s affairs or matters connected with the Company’s affairs.

The case of Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452 (Martin)

In Martin, it was found that an applicant is entitled to rely on the cumulative effect of a number of actions to constitute oppression.  In this case, the plaintiff sought relief primarily on the basis of oppression pursuant to Section 260 of the the Act, which has been replaced by Sections 232 and 233.

The alleged acts of oppression were:

• misuse of money and assets of the company;
• failure to call general meetings and directors’ meetings and/or to give notice of such meetings to the plaintiff;
• failure to keep proper accounting and other records of the company;
• failure to provide the plaintiff with access to the records of the company; and
• other matters, such as a purported transfer of ten shares between the second and third defendants and the appointment of the second defendant as manager.

These actions were mainly alleged against the second defendant, Mr Harte.  The plaintiff alleged that a number of transactions amounted to misuse or misappropriate use of company of company assets.   Although each breach on its own was not sufficient to amount to oppression, it was found that the cumulative effect was sufficient.

On one occasion, it was alleged that too much was paid for a vehicle which was then used both for company purposes and Mr Harte’s private purposes without proper disclosure.  As the transaction was a dealing on behalf of the company by Mr Harte, Hodgson J held that there was a clear breach of fiduciary duty.

Other examples of breaches of fiduciary duty involved hotel accommodation benefits offered to the company, which was used by Mr Harte for other than company purposes.  Furthermore, audio-visual equipment to be awarded as prizes at a squash tournament sponsored by the company was instead gifted to members of the company and kept at Mr Harte’s home.  This was held to be another breach of fiduciary duty.

In relation to oppression, it was raised as a defence that it was necessary to show on-going oppressive conduct.  In addition the oppressive conduct must have the character or unfairness or unjust detriment to the plaintiff, and the conduct must not be acquiesced in by the plaintiff.

The defendants referred to the cases of Spargos Mining NL v Fuller [1998] WASC 219, Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 and John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63, respectively.

In this regard, Hodgson J reasoned that the Court could consider the cumulative effect of a number of acts or omissions.  In his judgment, it was said at [66] that:

“Mr Harte regularly and in breach of his fiduciary duty mixed his own affairs and that of the company. The breaches of fiduciary duty were not de minimis. He did not disclose his conduct, as he was required to do, to Mr Martin – nor, probably, to the other directors either. The records kept under his supervision are so inadequate that it is extremely difficult, if not impossible, to sort out the true position in relation to the company’s finances. From mid-1994 onwards, he set about to make it difficult for Mr Martin and his advisers to have access to company records and to participate in a meeting which could consider the business of the company. In my opinion, these matters amount to oppression under both paragraphs of s260(2). The other directors were not active in this oppression, but, at least by their conduct in these proceedings, they have acquiesced in it.”

The issue in this case was that no one instance was sufficient to result in a finding of oppression.  Instead, oppression required consideration of the combined or cumulative actions.

Takeaways

Martin raises the issue that an individual act by an errant director may not be sufficient to amount to oppression.  However, the case illustrates that the cumulative effect of a director’s actions over time may support a finding of oppression, especially if the matters involve financial misconduct.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63

Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452

Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

Spargos Mining NL v Fuller [1998] WASC 219

Further information about shareholder oppression

If you need assistance in initiating or defending legal proceedings for shareholder oppression, please telephone me for an obligation free and confidential discussion.

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.

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