It is not uncommon in closely held private companies for there to be shareholder disputes which result in a company winding up. In such cases-what can the shareholders do to resolve the dispute?
Case study- Grounds for winding up
In Van Wijk (Trustee) ,in the matter of Power Infrastructure Services Pty Ltd, (214) FCA 1430, (12th December 2014) the shareholders could not resolve their differences and applied to the Court for orders appointing a liquidator and winding up.
The Court granted the orders sought under the “just and equitable” provisions of the Corporations Act:
Under S 461 (1) (k) the Corporations Act 2001, the Court may order a winding up if “the Court is of opinion that it is just and equitable that the company be wound up.”
In this regard, the Applicant relied on s 467(4) of the Act as raising relevant considerations.
That subsection provides where the application is made by members on the ground that it is just and equitable that the company should be wound up, 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.
In the case, the company was solvent and trading. The dispute was acrimonious and the mutual co operation and trust between the competing shareholders had broken down completely. The Court reviewed the authorities and cited with approval authorities where the disputes led to a frustration of the commercially sensible operations of the company in accordance with the incorporator’s expectations and a loss of confidence was justified.
In the circumstances-while acknowledging the consequences of such a drastic option-the Court appointed a provisional liquidator.
The decision highlights the grounds for winding up under the just and equitable grounds where there is a shareholders dispute which results in a breakdown of mutual trust and confidence such that it will frustrate the commercial operations of the company.
It is important that in establishing companies that in the first instance-there is a proper means of resolving disputes in shareholder agreements and that efforts are made to exhaust alternative dispute resolution.
In the absence of a resolution however-those shareholders affected may rely on the Courts for an ultimate solution.
For assistance and advice on winding up and shareholder disputes, contact us.