In oppression proceedings, the Court is extremely reluctant to wind up an otherwise flourishing, solvent company on the ‘just and equitable’ basis pursuant to section 467(4) of the Corporations Act ("Act").

Nothwithstanding the alleged oppression, the Court will be reluctant to wind-up a company in circumstances where employees are dependant upon the company for their livelihood.

This occurred in Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14. Sifris J declined to make an order winding up the company pursuant to s 467(4) of the Act. Instead, he allowed the parties a further opportunity to negotiate a buyout between shareholders.

Facts

Two brothers, Peter and Ian, held 50% each of the shares in the Extons group of earthworks, excavating and contracting companies (“Extons”). The business had been built up over decades since the 1970’s and prospered.

The brothers divided their responsibilities in the business: Ian in management and administration; Peter in site management.

From March 2015 their relationship soured over a project. Peter sought equal treatment in the business, not as an employee, mere works supervisor or machine operator, even though he was an equal owner and director. A bitter family dispute ensued.

The plaintiff’s claim (by Peter) was that Ian had:

excluded Peter from the business;
caused Extons to fail to tender for new work;
caused Extons to make payments to Ian in particular;
used Extons’ funds for the benefit of Ian;
caused Extons to make payments to a related company for Ian’s benefit; and
caused the sale of Extons’ machinery outside the ordinary course of business

Ian (and his interests) sought a winding up order pursuant to section 461(1)(k) of the Act on the just and equitable ground. Ian wanted to sell his share in the business for $12m. Peter had offered $8.5m. A price couldn’t be agreed upon.

Oppression findings

The Court found that five payments made by Ian constituted oppressive conduct:

1) First payment: A related company owned by Ian (Defendant) received a payment of $335,012.00 earned by Extons. The Court found this payment:

Had no legitimate basis;
Was a breach of fiduciary and statutory duty;
Ignored the corporate form;
Ian considered the equipment side of the business to be his by ignoring the corporate form;
Ignored that fact that Extons was entitled to the payment having undertaken the transactions;
Extons earned and should have received the profit;
Extons was impoverished;
Was not in the best interests of Extons as a whole;
Was prejudicial to and discriminated against other shareholders.

Notably, even though Ian repaid the $335,012 to Extons and the oppression was ‘gone’, section 232(e) was still enlivened. The only question concerned whether there was any utility in any remedy or order.

2) Second payment: Ian made payments for his benefit totalling $30,800.00. The Court found at [65] that “the breach of duty was clear”, and any breach alleged by the other side meant “The breaches do not cancel each other out”.

3) Third payment: A distribution paid to Ian of $45,074.54 at [66].

4) Fourth payment: Causing Extons to make a payment to Ian’s son at [71].

5) Fifth payment: Causing Extons to make payments to Burns Equipment (a company related to Ian’s interests) at [71].

All five payments engaged the provisions of sections 232(d) and 232(e) of the Act.

The other grounds of oppressive conduct alleged by Peter were dismissed:

Excluding Peter from the business;
Causing Extons to fail to tender for new work;
Causing Extons to sell machinery outside the ordinary course of business; and
Causing Extons to enter a transaction (regarding a bulldozer) outside the ordinary course of business.

Appropriate remedy

Ian (Defendant) had asked for the companies to be wound up under the ‘just and equitable’ provisions pursuant to s 461(1)(k). The Peter (Plaintiff) said that this was inappropriate where other remedies were available, especially where Ian was effectively a seller and Peter a buyer.

No winding up

The Court declined to order a winding up. This was because courts are “extremely reluctant to wind up a solvent company” and winding-up should be a “last resort” at [89], especially if there will be an adverse effect on employees.

The Court found at [84] that the words “some other remedy” in s 467(4) included not just legal remedies but alternative courses of action otherwise open to the parties, such as an offer to purchase shares. The Court allowed Peter an opportunity to buy out Ian subject to determination of a price.

Legal principles of note

In addition to the refusal to wind-up, Sifris J decided the answers to three key legal questions regarding sections 232 and 233 of the Act:

1) Must oppressive conduct continue to the hearing for the court to make an order pursuant to section 233 of the Act?

The Court concluded at [34] that:

“the better and predominant view is that the sections are enlivened if the conduct occurs at any time and notwithstanding that it may have ceased at the time of trial.”

2) What is conduct ‘contrary to the interests of the members as a whole’ pursuant to section 232(d) of the Act?

The Court decided at [39] that:

From a review of the authorities the better view is that s 232(d) is separate and distinct from s 232(e) and that a breach may not necessarily involve commercial unfairness. The court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny is in the best interests of the company as a whole, apart from its members. In this context breaches of duty (whether statutory or fiduciary) by directors and officers may well be conduct that is not in the best interests of the company as a whole.

Whether breaches of a duty in a small family type company, where there is an overwhelming identity of interest between shareholders and directors, fall within the sections is a related matter. There is authority, as referred to above, to the effect that where there is consent or ratification of such conduct, it may, in context and in the circumstances, not be contrary to the interests of the members as a whole or indeed unfair.

This test doesn’t add much to the tests which have already been formulated by the courts. Specific examples of oppressive conduct are listed below.

3) What constitutes conduct ‘oppressive to, unfairly prejudicial to or unfairly discriminatory against a member pursuant to section 232(e) of the Act?

The Court decided at [48] that:

From a review of the more relevant authorities, the critical issue is commercial unfairness, judged objectively. It usually results in some harm or prejudice by such conduct that is not reasonably or commercially justifiable. Of course all of the facts and circumstances and context needs to be examined in order to determine whether such conduct alleged is oppressive. It goes without saying that the authorities referred to below deal with a range of different factual considerations and relationships. Each case must depend on its own facts and circumstances.

When is it 'just and equitable' to wind up a company pursuant to section 461(1)(k)?

A management deadlock preventing the company from pursuing a cause of action
Impossible to achieve the objectives for which the company was formed
New directors cannot be appointed to fill a vacant board
Serious fraud, misconduct or oppression
Failure by the company to comply with its statutory and constitutional requirements
Company being used to commit fraud
Failure of substratum (no longer conducting the business which members believe it should)
Operating an unregistered managed investment scheme
Carrying on a financial services business without an AFSL
Irretrievable breakdown in relationships and mutual trust between members
No confidence that the company's affairs would be properly conducted

(Examples above from the Annotated Corporations Legislation, Lawbook Co, 2018 at CA.461.60)

Oppression proceedings - key principles and procedures

See my post here.