Shareholder Oppression – No Divorce Where Marriage Still 'Commercially Viable'

In a recent decision, the Supreme Court of New South Wales has confirmed that the winding up of a company is a remedy of last resort in cases involving allegations of shareholder oppression or in cases where there has been an irreparable breakdown in relationships.

Essentially, a winding up of the company will not be ordered, regardless of how much the parties dislike each other, where the breakdown in the relationship has not had a significant impact on the operation of the business.

In the matter of Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152 Austin J considered the application of the court's discretion to grant relief on the grounds of oppression, and on the just and equitable ground for winding-up a company.

The case involved disputes in respect of companies controlled by Mr Tomanovic and Mr Sayer, GEMC Pty Ltd and Argyle HQ Pty Ltd. At the time of the proceedings, Mr Tomanovic had ceased to play an active role in either company. The parties had attempted to negotiate a separation agreement prior to the proceedings however, they failed to reach final settlement. Mr Tomanovic brought proceedings alleging oppression and seeking winding-up orders under ss 233 and 461(1)(f) of the Corporations Act, or alternatively, on the just and equitable ground in s 461(1)(k). Alternatively, Mr Tomanovic sought a buy-out order under s 233.

Mr Tomanovic's oppression claims were grouped into four categories:

1. the failure of Mr Sayer to complete the separation envisaged by heads of agreement drafted during settlement negotiations and the buy-out of Mr Tomanovic
2. the diversion of money and assets of GMEC for the benefit Mr Sayer
3. the reduction in equity in Argyle HQ assets for the benefit of Mr Sayer, without the consent of Mr Tomanovic
4. oppressive conduct generally, including failure to make books and records available, failure to provide information, failure to convene annual general meetings, failure to pay dividends, attempts to dilute the shareholdings of Mr Tomanovic and a complete breakdown in the relationship between Mr Sayer and Mr Tomanovic.

In dismissing Mr Tomanovic's application, Austin J found that the heads of agreement created by Mr Tomanovic and Mr Sayer were not legally binding, and the failure of Mr Sayer to comply with the terms could not be regarded as oppressive conduct. The evidence put forward by Mr Tomanovic with respect to the other three categories failed to establish 'an oppressive or unfairly prejudicial course of conduct' sufficient to ground the relief sought, regardless of the fact that the court found some of the conduct involved 'an absence of compliance with proper procedures'.

The oppression remedy

Commenting generally on the oppression remedy, Austin J confirmed the court's approach in matters of this kind as follows:

• relief will generally be inappropriate if there is no continuing oppression
• unfairness is assessed objectively in the eyes of a commercial bystander
• non-fulfilment of expectations will not establish oppression, if there has been some good reason for the extinguishment of the expectation
• judges should not remain in their ivory tower when judging corporate activities to see if there is oppression
• the extent to which the minority shareholder has 'baited' the majority shareholder to act in an oppressive manner is relevant
• there is no basis for an oppression claim where the party claiming oppression has acquiesced or consents to the conduct.

Generally, an order for a compulsory buy-out is subject to the broader principle that the court will seek to craft orders which are the least intrusive to the management of the affairs of the company. Winding up should be regarded as a remedy of last resort, and not granted if a less drastic form of relief is available and appropriate.

Just and equitable grounds for winding-up

Austin J also declined to grant winding-up orders on the just and equitable ground. In doing so, Austin J stated that for a 'breakdown' or 'loss of confidence' to justify a winding up, the following elements must be satisfied:

• the 'breakdown' must be of a nature and degree that materially frustrates the commercially viable and sensible operations of the company in accordance with expectations and the 'loss of confidence' must be justified; and
• there must generally be a restriction upon the transfer of the member's interest.

In this case, there was no deadlock because Sayer was a majority shareholder.

Austin J commented that:

Austin J concluded that "it would be unwise to order the winding up of the viable and now reasonably long-standing business, in circumstances where the breakdown in the shareholder relationship is not materially frustrating the commercially viable and sensible operations of the company."

This case is a timely reminder of the importance of drafting a shareholders' agreement at a time when the parties are getting on and can negotiate sensibly.

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