Sufficient Deadlock: Wind Up Justified By Failure To Achieve The Business Underlying Purpose - Insolvency/Bankruptcy

This week's TGIF considers the decision of the Supreme Court of New South Wales In the matter of Gearhouse BSI Pty Ltd [2021] NSWSC 98. In this case, one of the joint venture parties obtained an order to wind up the joint venture on the basis that the underlying purpose of the business had failed.

Key takeaways

Winding up a company is not restricted to circumstances in which it has become impossible to achieve the objective for which the company was formed, impossible to carry on the company's business or where there are cases of serious fraud, misconduct or oppression in regards to the affairs of the company.
Even in cases where there is a prospect of the business continuing, where there is a breakdown of trust and confidence, a deadlock incapable of resolution, a genuine loss of trust and confidence, and the commercial reality indicates that prospects of continuation are unlikely, a Court will be more likely to determine that the 'substratum', or underlying purpose of the business, has failed.

Background

Broadcast Sports International LLC (BSI) and Gravity Media (Australia) Pty Ltd (GMA) each held 50% shares in an incorporated joint venture Gearhouse BSI Pty Ltd (GBSI JV). GBSI JV was established for the purpose of delivering in-car camera systems for V8 Supercars Race Series (or successor series) under a Television Production Services (In-Car Camera Systems) Agreements (TPSA).

Under the TPSA, V8 Supercars exclusively appointed GBSI JV to provide in-car camera systems equipment and services in relation to those systems. The TPSA was for a fixed term of five years (expiring 31 December 2020). Outside of the GBSI JV, BSI and GMA were competitors.

The parties transferred the equipment necessary to perform the TPSA to GBSI JV. Under the terms of the shareholders' agreement entered into by the parties, the parties had the option of purchasing from GBSI JV - at fair market value - the equipment that each transferred to GBSI JV at the commencement of the shareholders' agreement.

Upon the expiry of the TPSA, BSI sought to terminate the shareholders' agreement and wind up GBSI JV. In contrast, GMA wanted to keep the arrangement afoot and pursue an arrangement with V8 Supercars. Ultimately, BSI and GMA did not reach an agreement as to whether to terminate the shareholders' agreement and wind up GBSI JV.

Absent the parties coming to an agreement, there were a number of events that triggered the automatic termination of the shareholders' agreement. Relevantly, they included an order of a court being made to wind up GBSI JV. Upon termination, BSI would be able to exercise an option to purchase the assets it transferred to GBSI JV at fair market value.

BSI sought orders to, among other things, wind up GBSI JV pursuant to Section 461(1)(k) of the Corporations Act 2001 and have liquidators appointed, as well as a declaration that the shareholders' agreement be terminated so as to enable BSI to exercise its option to buy-back the equipment it contributed at fair market value.

While the Court considered a number of issues, the crux of the case was whether it was just and equitable that GBSI JV be wound up.

Key submissions

BSI submitted that GBSI JV's business ceased and its substratum failed when the TPSA expired on 31 December 2020 because GBSI JV was established for the limited purpose of the TPSA. Also, that the TPSA was not renewed (and would not be renewed because BSI has decided not to agree to its renewal for its own commercial reasons) and, in these circumstances, "the purpose of GBSI JV, as an entity, had been exhausted".

In contrast, GMA submitted that the substratum had not failed because the 'Business' of GBSI JV was not limited to the provision of in-car camera systems under the TPSA for the 2016-2020 season, but extended to the provision of those systems under any renewed TPSA.

As a result of the V8 Supercars offer, GBSI JV had an opportunity to continue its business and the dispute resolution procedures under the shareholders' agreement were available to deal with the present deadlock between shareholders as to whether GBSI JV should take up that opportunity.

Decision

The Court determined that it was just and equitable that GBSI JV be wound up and made the declarations sought by BSI. In doing so, the Court rejected submissions which suggested that winding up under Section 461(1)(k) was restricted to circumstances in which it had become impossible to achieve the objective for which the company was formed, impossible to carry on the company's business, or cases of serious fraud, misconduct or oppression in regards to the affairs of the company.

The Court noted that the exercise of the power under Section 461(1)(k) is broad and incapable of exhaustive definition and that an applicant for winding up under that section is entitled to rely on any circumstances of justice and equity that affect them in their relationship with the company, and that each case must turn on its own facts.

In arriving at its decision, the Court noted that the substratum of GBSI JV has failed in the sense that, as a matter of practical reality, it became impossible for GBSI JV to continue to achieve the purpose for which it was formed. That is, carrying on the business of providing in-car camera systems to V8 Supercars Race Series under the TPSA or any renewed TPSA. The TPSA had expired, it was not renewed and there was no evidence of other business opportunities.

The Court also considered that given the complete loss of trust and confidence between the joint venture parties, the prospect that further negotiations would result in resolution between BSI and GMA to enter into a further agreement was fanciful.

Ultimately, the Court noted that:

"Having regard to the breakdown in cooperation and trust between the shareholders, BSI's justified loss of confidence in the management of GBSI, GMA's conduct in deploying GBSI's valuable equipment without authority and refusing to retrieve it, the deadlock that is incapable of resolution as a result of the loss of trust and confidence and the practical reality that these matters have brought about a failure of the substratum of GBSI, I am of the opinion that it would be just and equitable to wind up GBSI in the absence of any other remedy."

Comment

This decision highlights the fragility of joint ventures between competitors and serves as a timely reminder of the importance of ensuring these arrangements are carefully structured so as to account for future commercial arrangements and, in the alternative, provide for an appropriate mechanism to wind down the business of the joint venture.

As our TGIF of 5 March 2021 showed, a mere breakdown or loss of confidence is not necessarily sufficient to enliven the discretion to wind up the company.

However, in circumstances where there is a deadlock incapable of resolution and a genuine loss of trust and confidence, a Court may well determine that - as a commercial matter - the substratum of the business has failed, and wind up the company.

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.