In difficult economic times hard decisions – like to dissolve a joint venture – may have to be made. But those decisions need not be rushed or unprincipled. And good money can be thrown away if the right course is not adopted, as a recent Federal Court case demonstrates.
The present economic climate has already led, and will continue to lead to in the short term, a reassessment of business relationships. Difficult questions about whether you can trust your business partner or whether your joint enterprise is robust enough are on the minds of many small, medium and large enterprises.
If action is to be taken to bring to an end a business relationship, then the steps taken should be sure footed. Ideally, all involved will be of like mind and an amicable settlement will be reached. But, experience tells us that breaking up isn't always easy to do.
Some of the difficulties posed by a hotly contested dissolution of an incorporated joint venture are set out in the case of Amlaki FZ LLC v Pinnacle Network (Australia) Pty Ltd  FCA 1491.
Amlaki FZ and Pinnacle Network had established a joint venture to sell, lease and market properties and accommodation over the internet. The joint venture operated through an Australian company called Amlaki Australia Pty Ltd, in which Pinnacle Network held 20 shares and Amlaki FZ held 80 shares. Mr Balfaqih represented Amlaki FZ and Mr Richards represented Pinnacle Network on the board of the joint venture company. Mr Richards was also the company secretary and chief operating officer of the joint venture.
The relationship between the parties broke down, and Amlaki FZ decided to remove Mr Richards as director and company secretary of Amlaki Australia – which would also result in Mr Richards losing his job as chief operating officer.
For that purpose, a shareholders meeting was called and held. But because Mr Richards on behalf of Pinnacle Network either could not attend or sought to avoid attending, there was no quorum at that meeting – s 249T of the Corporations Act requiring that both shareholders attend for there to be a quorum. This meant that the resolutions passed at that meeting which dismissed Mr Richards were technically invalid.
To repair the position, Amlaki FZ and Mr Balfaqih applied under s 1322(1)(b) of the Corporations Act for an order that the resolutions were not invalid notwithstanding the absence of a quorum. The orders sought were made by the court on the grounds that it would have been an exercise in futility, and wasteful of costs, to require another meeting to achieve a known result – Amlaki FZ having 80% of the shares would enable it to pass the resolutions despite any resistance from Pinnacle Network.
This outcome, though, did not mean that Amlaki FZ and Mr Balfaqih had won.
Although Amlaki FZ and Mr Balfaqih were successful with their application and Mr Richards was no longer a director and company secretary, Amlaki FZ and Mr Balfaqih were nonetheless liable to Pinnacle Network and Mr Richards for their legal costs of the application. This is considered by the courts to be the price of curing a procedural irregularity.
In addition, Pinnacle Network still held 20% of the shares in Amlaki Australia.
To completely extricate itself from the joint venture, Pinnacle Network commenced proceedings of its own. In those proceedings, Pinnacle Network claimed that Amlaki FZ and Mr Balfaqih had engaged in oppressive conduct under s 232 of the Corporations Act and therefore Amlaki FZ should buy out Pinnacle Network's 20% shareholding, or alternatively Amlaki Australia should be wound up pursuant to s 461 of the Corporations Act on the basis that the affairs of Amlaki Australia were not being conducted in the interests of all shareholders or that it would be just and equitable to wind the company up.
Ultimately, Pinnacle Network's proceedings were settled, with Pinnacle Network agreeing to sell its shares.
But this outcome did not mean that Pinnacle Network and Mr Richards had, on the whole, won the litigation. This is because the sale price for Pinnacle Network's 20% shareholding was only $5,000, Mr Richards lost his job as chief operating officer and as Pinnacle Network had failed to accept an offer of compromise made earlier in the proceedings for $10,000 it was ordered to pay a portion of Amlaki FZ's and Mr Balfaqih's legal costs of these proceedings on an indemnity basis.
All in all, therefore, it is fair to conclude that no party really won this dispute.
The outcome in Amlaki FZ v Pinnacle Network provides us with the following salutary lessons:
- try to avoid procedural irregularities when terminating a business relationship, although this may not always be possible;
- consider an offer of compromise on its merits, as your claim may not be worth as much as you wish it were worth;
- the maxim that in litigation there is only one winner is not always true, as sometimes all parties can lose; and
- breaking up a business relationship is not easy to do.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.