Last Friday Gardiner AsJ in White Family No 1 Pty Ltd v Organic Brands Pty Ltd & Anor considered grounds for winding up a company on just and equitable grounds.

Facts

In 2006 Ms Smith and Ms White agreed to establish a new business, through a corporate entity, which would sell organic skin and body products produced by an entity controlled by Ms Smith.  A company was duly incorporated in 2007 with Smith and White each being a director and having five of the ten issued shares.  Over the next 2 years the relationship deteriorated markedly and, as at the application date, the affairs of the company was in disarray. There has been no formal meeting of directors and no tax return filed. The company ceased trading in August/September 2010.

Decision

The Court has a very wide discretion under section 461(1)(k) of the Corporations Act to wind up a company on just and equitable grounds [12].  Gardiner AsJ cited the relevant elements giving rise to jurisdiction, as extracted from the House of Lords decision in Ebrahimi v Westbourne Galleries Limited, as being one or more of the following:

(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence … ;

(ii) an agreement, or understanding, that all, or some … of the shareholders shall participate in the conduct of the business;

(iii) the restriction upon the transfer of the member’s interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

It is necessary to have more than a mere breakdown or loss of confidence between the parties to wind a company up on just and equitable grounds.  The elements that must generally be satisfied, citing Austin J in Tomanovic v Argyle HQ Pty Ltd at [13], to wind a company up on such grounds are:

• the “breakdown” must be of a nature and degree that materially frustrates the commercially viable and sensible operations of the company in accordance with the incorporators’ expectations; and any “loss of confidence” must be justified. such as when:

(a) “where a working relationship predicated on mutual co-operation, trust and confidence has broken down”, such that the “continuation of such an association would be a futility” ;

(b) where there is “no real prospect that the parties can work together sensibly to reach the necessary agreement to be able to conduct the company’s business in the future”, such that “the company’s operations in the future will not be able to be conducted in any commercially viable and sensible way”;

(c) there is a “serious and operative state of mistrust and disharmony” between incorporators;

(d) where the relationship between incorporators “has completely broken down”, such that the company “could not continue to function meaningfully”;

(e) where “the foundation of the whole agreement that was made, that the [incorporators] would act as reasonable men with reasonable courtesy and reasonable conduct in every way towards each other”, and there has been a breakdown in communication;

(f) there is a “justifiable lack of confidence in the conduct and management of the company’s affairs”;

• there must generally be a restriction upon the transfer of the member’s interest. In circumstances where there are no restrictions on transfer, and there is no evidence that the “board would refuse to register a transfer in favour of a respectable transferee”, “this factor alone makes it extremely difficult for the plaintiff to succeed in the application” for wind-up on the just and equitable ground in the absence of oppression.

• An “important factor” in the exercise of the Court’s discretion is the extent to which the applicant is responsible for any breakdown of the relationship .

The defendants argued that the fault for the deadlock and disarray was that of Ms White and the better course was a voluntary winding up after the books of account were brought up to date by an independently appointed accountant or for the proceeding to be dealt with as an oppression action and that Ms Smith should buy out Ms White.  The Court rejected the latter submission on technical grounds, the originating motion did not seek such relief and there was no evidence to that effect in any event.  Further the court was of the view that the state of affairs made it impossible to properly value the company to permit this option. As to the former allegation the court could not determine fault, noting that wild accusations had eminated from both parties.

Because of the unclear nature of the financial records the court ordered that each party should pay their own costs ([20]).