Just and equitable grounds – but what about that helicopter?

In Warner v Global Pacific Aerospace Pty Limited [2012] VSC 291 the Victorian Supreme Court held that it would be just and equitable to wind up the company following a breakdown in the relationship between the two (2) directors who were equal shareholders.  This article considers this case and the conduct that was held to be oppressive.

Background to the Warner case

In Warner v Global Pacific Aerospace Pty Limited [2012] VSC 291 a dispute occurred between the two (2) directors of a company who were equal shareholders where they had authorised the purchase of an expensive helicopter for $1.6 million (Director X and Director Y).  In order to obtain finance for the purchase, $1.12million was borrowed and secured via a mortgage, for which Director X provided a personal guarantee.

Ultimately the company was unable to make the payments and the financier forced the sale of the helicopter.  There was a significant shortfall in the amount recovered for the helicopter with only $457,000 being recovered.

The financier then pursued Director X and the related entities to recover the shortfall, which was subject to the personal guarantee.  Surprisingly, the purchaser of the helicopter turned out to be a different company to the one stated whose ultimate beneficial owner was Director Y.  Director Y had not provided any guarantee for the loan.

The conduct complained of

Each Director alleged that the other had breached their duties:

• Director X claimed that Director Y had breached his director’s duties by using his position to obtain a lower price for the helicopter, which resulted in Director Y applying to wind up the company on the grounds that it would be just and equitable to do so.
• The Court held that it would be just and equitable to wind up the company because it was being sued by a secured creditor, a dispute had occurred resulting in the relationship breakdown between directors, and it was ultimately held that there was evidence to support each Director’s claim that the other had breached their duties.

Winding up on just and equitable grounds

In cases where the relationship between the parties has completely broken down, an application to a Court of competent jurisdiction may be made pursuant to section 461(k) of the Corporations Act 2001 (Cth) (Act) to wind the company up on just and equitable grounds.

Section 461(1)(k) of the Act provides that:

‘The Court may order the winding up of a company if: …. The Court is of the opinion that it is just and equitable that the company be wound up.’

The Court will need to be satisfied that the relationship between the parties has broken down as appointing a liquidator is seen as a drastic step.  Because of this, where negotiations have taken place for the buyout of a party, the section 461(k) remedy forces the parties to a settlement, often on the “steps of the Court” as it is said.

An alternative remedy exists under section 232 of the Act whereby the Court may make an order under section 233(1)(a) that the company be wound up if the following provisions are met:

‘(a) the conduct of a company’s affairs; or

(b) an actual or proposed act or omission by or on behalf of a company;

is either:

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

(d) contrary to the interests of the member as a whole; or

(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or member whether in that capacity or in any other capacity.’

Conclusion

A Court may make an order that a company be wound up where the relationship between parties has broken down however this is often considered a drastic step.   A buy out order may be pleaded as an alternative.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Corporations Regulations 2001 (Cth)

Cases

Warner v Global Pacific Aerospace Pty Limited [2012] VSC 291

Further information or assistance with a shareholder oppression matter

If you need advice on shareholder oppression or winding up on just and equitable grounds, contact us for a confidential and obligation-free 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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