Just and equitable winding up for shareholder oppression

In matters involving the oppression of minority shareholders by the majority the usual legal remedy is to pursue relief for oppression as contained in sections 232 and 233 of the Corporations Act 2001 (Cth)(Act). However section 233(2) of the act also allows for an aggrieved party to seek an order winding up the company on just and equitable ground as if the order were made under section 461.  Section 233(2) represents the intersection of the just and equitable winding up and shareholder oppression.

What is shareholder oppression?

Shareholder oppression occurs when the majority shareholders in a company misuse their power to oppress the minority shareholders.  This can occurs when the conduct of a company 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.[1]

Oppressive conduct is usually interpreted narrowly by the Courts, and focuses on the nature of the conduct rather than its effect.  It includes conduct which ‘lacks the degree of probity which the members are entitled to expect’.[2]  Unfairly prejudicial or discriminatory conduct must go beyond mere prejudice or discrimination, and usually requires some departure from a reasonable standard of fairness.[3]

When can a winding up remedy be sought for shareholder oppression?

Where oppression is held, the Court may make any order in respect to the company, including an order to wind it under to section 233(2) of the Act/ Corporations Act 2001 (Cth) (Act).  Under section 461(k) of the Act, the Court may make an order for winding up if it is held that it is just and equitable that the company be wound up.

Case law shows that the just and equitable ground is only available where there is no other option for dealing with the affairs of a company.  This was the situation in the case of Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] 3 Qd R 520 (Asia Pacific) which was a decision of the Full Court of the Supreme Court of Queensland that involved an interpretation by the trial judge of section 467(4) of the Act.

The Asia Pacific case

In Asia Pacific, the minority shareholders claimed that the company had been conducted in a manner that was oppressive or unfairly prejudicial.  Relief was sought in the form of an order for the winding up of the pursuant to section 461(k) of the Act.  Accordingly, the Court was required to consider the test contained in section 467(4) of the Act.

Section 467(4) provides that:

“(4)  Where the application is made by members as contributories on the ground that it is just and equitable that the company should be wound up or that the directors have acted in a manner that appears to be unfair or unjust to other members, the Court, if it is of the opinion that:

(a)  the applicants are entitled to relief either by winding up the company or by some other means; and

(b)  in the absence of any other remedy it would be just and equitable that the company should be wound up;

must make a winding up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.”

The Court was required to interpret the meaning of the word “unreasonably” and said of that its meaning of requires:

“an objective assessment of the applicant’s preference for a winding up order, rather than a consideration of whether the applicant believes that it has good reason to prefer that outcome.”[4]

The case highlights that the winding up remedy is the last resort[5] and should not be the preferred remedy sought.  The Court placed weight on whether there was another remedy that was available, with McMurdo JA saying at [46]:

“In my view, the reasonableness of the applicant’s position is to be assessed by reference to the consequences of the events and circumstances upon which the application is founded and what is necessary to redress them.  If they could be redressed only by a winding up, then the pursuit of a winding up order would not be unreasonable in the relevant sense.  On the other hand, if there is an alternative remedy which would equally redress those consequences, then an applicant’s preference for a winding up order would usually be considered to be unreasonable, because ordinarily the winding up of a solvent company will have far reaching effects.”

“Consequently a winding up will be ordered if there is no other remedy which is adequate, in that it would redress the consequences of the facts and circumstances which are the basis for relief.”

Inadequate and poor stewardship of a company’s affairs

The case of Pacific Dairies Limited v Orican Pty Ltd [2019] VSC 647 (Pacific Diaries) involved two (2) matters, the first of which was an application to set aside a request by certain members for the directors to conduct a general meeting of the Company (Meeting Proceedings).

The second proceeding was referred to as the “oppression proceeding” (Oppression Proceedings).  This was an application by a Mr William Clarke (Clarke) pursuant to section 232 of the Act alleging the conduct of the directors was oppressive.  Clarke was the chief executive officer at Pacific Dairies Limited ACN 095 821 971 (Company) until he resigned on 31 March 2014, remaining a minority shareholder.  Clarke alleged that the Company’s affairs were conducted in a manner that were oppressive to its members under Section 232 of the Act.  The actions alleged to be oppressive where:

  • since at least 2015, the Company had achieved none of its public announced goals and initiatives to expand its core business;
  • despite the rapidly deteriorating financial positon, the directors of the Company have received payment of extremely high directors’ fees by way of the issue of shares and options; and
  • the directors’ refused to call a general meeting requested by members of the Company made on 19 May 2019 to decide on the composition of the board of directors.

Sifris J held at [51] that neither individually nor collectively was sufficient to amount to oppression pursuant to section 232 of the Act.  Most relevantly it was said by Sifris J at [52] that:

“Inadequate and poor stewardship, management and decisions by directors and any consequent dissatisfaction by shareholders does not of itself necessarily give rise to oppressive conduct”.

In coming to this decision it was said at [52] that:

“It is necessary to carefully examine the conduct and assess whether it constitutes commercial unfairness or discrimination against some members or whether the conduct is in the interests of the members as a whole.”

Because it was held that the conduct was not oppressive it was not necessary to consider the remedy sought.  It was also said in relation to the Meeting Proceeding that the Court was reluctant to interfere with a minority shareholder’s right to requisition a meeting unless it is called for some purpose ulterior to the passing of the resolutions contained in the requisition.

The failure to call a meeting pursuant to 19 May 2019 request did not constitute oppression as there was a pending Annual General Meeting for the same purpose to take place in November 2019.  In reaching the decision, the Court emphasised its unwillingness to interfere in shareholder democracy, particularly in circumstances where there is an absence of a winding up application against the Company. Accordingly, both proceedings were dismissed.

Takeaways

The case of Pacific Diaries highlights the judicial reluctance to interfere in shareholder disputes.  To pursue a winding up remedy pursuant to section 461 of the Act, there must be a need for conduct that constitutes commercial unfairness or discrimination against members or that the conduct is in the interests of the members as a whole.  There must also be no other option for dealing with the Company.  Hence, an alternative to a claim for oppression the winding up application on a “just and equitable” basis.

Further references

Legislation

Corporations Act 2001 (Cth)

Cases

Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] 3 Qd R 520

Pacific Dairies Limited v Orican Pty Ltd [2019] VSC 647

Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042

Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247

Wayde v NSW Rugby League Ltc [1985] HCA 68

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Shareholder oppression

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Further information

If you need assistance with shareholder oppression, please telephone me for an obligation free and confidential discussion.

Franchising lawyersMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013 | 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] Corporations Act 2001 (Cth) s 232.

[2] Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042.

[3] Wayde v NSW Rugby League Ltd [1985] HCA 68.

[4] Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] 3 Qd R 520.

[5] Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247.

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