Shareholders and Directors Disputes – Just and Equitable Winding Up – Shareholders

Disputes between company shareholders and directors are common
place and can have a significant impact on a company’s
operation. It is also not unusual for protracted disputes to
ultimately lead to irreconcilable situations that ultimately and
significantly limit the ability of a company to continue to
function. In such dire circumstances, while different exit
strategies exist to assist parties in navigating through the
dispute, more formal actions are often taken through Court
processes to ultimately break the impasse. One of the more common
relief sought, and yet the last resort a Court would often turn to,
is to ultimately wind up the company on just and equitable
grounds.

Just and Equitable Winding-Up

The circumstances in which a Court may make a winding up order
on just and equitable grounds are not closed or rigid and are
intentionally not limited in any way. Generally, the Federal Court
or the Supreme Court of a state or territory is empowered to order
that a company be wound up under s 461 the Corporations Act
2001 (Cth) (the Act). Under that provision,
the Court may wind up a company on numerous grounds. In the context
of shareholders and directors’ disputes, a Court may wind up a
company:

1. when oppression is presented in the conduct of the
   company’s affairs (see Shareholders and Director’s Disputes – A
   way forward); or




2. if the Court is of the opinion that it is just and equitable
   that the company be wound up.

Common factors that a Court generally considers when winding up
a company on just and equitable grounds include:

1. a failure of the main object of the company’s
   formation;




2. a deadlock in the management of the company;




3. a breakdown in the relationship between its shareholders;




4. a lack of confidence in the conduct and management of the
   affairs of the company;




5. where there has been fraud, misconduct or oppression in
   relation to the affairs of the company;




6. where there are present serious concerns about the
   company’s compliance with its statutory obligations, including
   the filing of tax returns;




7. where there have been breaches of the Act, including breaches
   of directors’ duties or an inadequacy of accounts or
   recordkeeping;




8. questions of commercial morality in the conduct of the
   company’s affairs; and




9. a risk to the public interest that warrants protection.

An application to seek a winding up order is by no means
guaranteed and is generally considered as a remedy of last resort.
A party seeking such an order must satisfy the Court that the
breakdown in the parties’ relationship is so significant that
it has frustrated the commercially viable and sensible operations
of the company. A Court would not order a company to be wound up in
circumstances where there are no restrictions to transfer the
applicant’s shares or there is satisfactory evidence that there
will not be a refusal to make a transfer of shares to a proper
transferee.

In fact, under s 467(4) of the Act, a winding up may not be
ordered under the just and equitable ground on the application by
members of the company if other less drastic relief is appropriate
and the applicants are acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.

A Recent Example

The above principles were recently explored in the decision of
the NSW Supreme Court In the matter of Munja Bakehouse Pty
Ltd [2024] NSWSC 6. That case concerned the business of Munja
Muffins, a muffin supplier based in Sydney.

Smith Street Marrickville Pty Ltd (ACN 632 121 129)
(Smith Street) was the owner of a property located
in Marrickville from which Munja Bakehouse Pty Ltd (ACN 168 272
071) (Munja) operated the business. Smith Street
owned the Marrickville property as trustee for the 30Smith Unit
Trust (Trust). A dispute arose between the
respective shareholders of those companies and the individuals that
stood behind them.

As part of the relief sought in the proceedings, the parties
ultimately sought orders for Munja and Smith Street to be wound up
on just and equitable grounds pursuant to s 461(1)(k) of the Act.
In this regard, Black J made comments to the effect that:

• The “just and equitable” ground for winding up a
  company under s 461(1)(k) of the Act is not limited by particular
  categories.




• Where a company was established on a basis of relationships of
  mutual confidence, a winding up order may be made on the just and
  equitable ground under s 461(1)(k) of the Act where irreconcilable
  differences emerge between its members.




• The circumstances in which the Court may make a winding up
  order under s 461(1)(k) of the Act also include circumstances where
  the substratum of the company has failed – that is, where the
  company has not achieved the objectives for which it was
  formed.




• A winding up order sought on the just and equitable ground
  requires the Court to have regard to the availability of some other
  remedy and whether or not a plaintiff would be acting unreasonably
  in seeking to have the company wound up instead of pursuing that
  other remedy.




• There is no absolute rule that the Court will not wind up a
  solvent company, although winding up is a last resort.

In this case, the application was made on the grounds that Munja
(and Smith Street) operated as a quasi-partnership and there was a
breakdown in the relationship such that there was no longer mutual
trust and confidence between the individuals ultimately behind
those entities. In this regard, the parties did not put in place a
shareholders’ agreement to manage the conduct between them,
were in dispute regarding their respective roles in the business,
and the Court expressly noted several instances of personal
conflict between them.

The Court also accepted that the continuation of the association
between the disputing parties would be futile and that there was no
reason to think the association would not continue to be beset by
“mistrust, disputes about pay and workloads, and personal
animus.” Ultimately, the Court found that a winding up
order should be made in respect of Smith Street and Munja.

However, before making such an order to operate immediately,
Black J noted that where a Court is otherwise minded to wind up a
company on just and equitable grounds, it will often postpone a
winding up order to allow the parties an opportunity to negotiate a
buy-out of a disputing parties’ interest in the relevant
company. Accordingly, Black J stayed the making of a winding up
order and the appointment of a receiver for 14 days to allow the
parties a final opportunity to resolve their differences in a
manner which will avoid the liquidation of the companies and the
winding up of the Trust.

Key Takeaways

It is not unusual or uncommon for companies to fall into
disarray as a result of a falling-out or ongoing dispute between
its key personnel. As demonstrated in the above case, there are
various remedies available to the Court to resolve a deadlock in
circumstances where the is a complete breakdown in the relationship
of a company’s members. This includes appointing a liquidator
to a company with the intention that it be wound up on just and
equitable grounds.

However, given the seriousness of a company having a liquidator
being appointed and the significant costs and potential diminution
of asset value which might come with that scenario, Courts are
reluctant to make such an order unless the circumstances warrant
the order and there is no other available remedy which might be
utilised. With the inevitability of a company being wound-up, the
parties in dispute may also be induced to ultimately act rationally
to come to a commercial agreement for a buy-out of a parties’
shares in that company, where no prospect of success to reach an
agreement previously existed.

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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.