Australia: There is a right way and a wrong way to handle shareholder disputes

Last Updated: 30 July 2015
Article by Jennifer Ball

Most Read Contributor in Australia, August 2016

Key Points:

Part 5.3A of the Corporations Act is not the appropriate mechanism for resolving shareholder disputes.

Sometimes, being creative with the law can end up creating more problems than it solves.

Take shareholder disputes, for example. The Corporations Act 2001 (Cth) provides three avenues for resolution. Minority oppression cases and the winding up of a solvent company on the just and equitable ground under section 461(1)(k) of the Act requires an application be made to the court and usually, descends into time-consuming and expensive disputes about the facts.

Reference should also be made to the possibility of voluntary liquidation, which does not involve the court but which, like winding up on the just and equitable ground, ultimately involves the company's ceasing to carry on business and being dissolved (which may not be what the parties want).

None of these approaches was adopted when the director/shareholders of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd fell out among themselves about the direction that the business should take (Re Australian Blue Mountain International Cultural & Tourist Group Pty Ltd [2015] NSWSC 937).

The shareholders enlist the liquidator

The majority shareholders approached a liquidator about a possible retainer to assist with negotiations with another director and minority shareholder. Several phone calls and meetings were held with the liquidator and the majority shareholders, during which the liquidator gave advice to the majority shareholders as to steps that they might take to investigate a misappropriation allegation against the minority shareholder. The minority directors were not part of those discussions.

As a result of the discussions, the majority convened a board meeting to appoint a voluntary administrator. The minority were given less than two hours' notice of that meeting. The minority attended the meeting by phone learning for the first time of the involvement of the liquidator. The minority withdrew from the meeting and hung up before the resolution was put to the meeting that the company appoint the liquidator to act as voluntary administrator.

Once appointed, the administrator set about trying to resolve the differences between the shareholder/directors (including investigating the possibility of the minority's selling out of the company).

At the first creditors' meeting, the minority directors expressed concern that reasonable notice had not been given to the minority shareholders in respect of the board meeting and that the majority shareholders/directors were using the voluntary administration process for an improper purpose in circumstances where the company was not insolvent.

The administrator's solicitor responded that if the minority directors wished to challenge the validity of the appointment, they should do so.

Court to administrator: it's not your job

The minority directors successfully challenged the administrator's appointment, on the grounds that:

  • there had been inadequate notice of the board meeting - being less than two hours; and
  • the resolution of the majority directors that the company appoint the administrator on the belief that the company was either insolvent or likely to become insolvent (an essential prerequisite to the appointment of an administrator under section 436A of the Act) was invalid as the relevant directors' opinion was not held or not held genuinely or in good faith.

These defects were sufficient to empower the court to make a section 447C declaration that the administrator had not been validly appointed. (The question of the payment of the administrator's remuneration, costs and expenses on a quantum meruit basis was to be determined at a later date.) This was despite a submission made by counsel for the administrator that the lack of reasonable notice of the directors' meeting be cured by section 1322(4) of the Act, which the court rejected on the basis that substantial injustice was caused to the minority directors.

The court emphasised the principle that an administrator should take reasonable steps to confirm the validity of his or her appointment if, immediately after appointment, the resolution or instrument of appointment does not appear to be valid or during the course of the administration, he is put on inquiry about the validity of his or her appointment. Further, the court said in relation to the solicitor's response to a party who raised the concerns as to the validity of the appointment:

"It does not seem to me to be sufficient in that situation for his solicitor to express the view that a party with a concern as to that issue could make its own application to the Court, abrogating the administrator's responsibility to address such an issue."

The court was also at pains to emphasise that the purpose of the voluntary administration process provided for in Part 5.3A of the Act, is not an appropriate process for resolving shareholder disputes:

"...Pt 5.3A of the Corporations Act was not introduced as a mechanism to resolve shareholder disputes and its use for that purpose would tend to expose the company, its creditors and its contributories to a risk, which these proceedings amply demonstrate, that substantial costs would be incurred and no benefit would be achieved if shareholders could not in fact resolve their differences, or indeed if the costs incurred by the administrator then became an obstacle to such a resolution."

Lessons for voluntary administrators and shareholders

The judgment is a useful reminder that it pays to consider the correct approach when dealing with shareholder disputes, preferably under the provisions of Part 54.4A of the Act as opposed to Part 5.3A.

The court makes it clear that Part 5.3A is not the appropriate mechanism to be used to resolve shareholder disputes, and the role of a voluntary administrator is not to get involved in attempting to resolve shareholder differences. It might only result in exposing parties to the risk of incurring substantial costs if no benefit is able to be achieved if the shareholders are unable to resolve their dispute.

It is also a reminder of firstly, the difficulties that can arise where there is an unordinary level of engagement with a liquidator which occurs prior to that liquidator's formal appointment to act as voluntary administrator, which engagement may not be fully captured by the common form of such disclosures.

It is also a reminder of the principle where an administrator is put on notice as to the validity of his or her appointment, it is the administrator that needs to take reasonable steps to confirm the validity of the appointment by making a prompt application to the court.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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