Winding up a company on just and equitable grounds, section 461(1)(k) of the Corporations Act; Giacobbe & Anor v Giacobbe & Anor  VSC 285 (28 June 2012), Warner v Global Pacific Aerospace Pty Ltd & Anor  VSC 291 (19 June 2012) and White Family No 1 Pty Ltd v Organic Brands Pty Ltd & Anor  VSC 247 (10 June 2011)
August 14, 2012 |
Section 461(1)(k) of the Corporations Act is a very useful provision when dealing with directors and shareholders who are in dispute but there is no evidence of oppression (where sections 232 and 233 would apply). The circumstances giving rise to the court exercising the very broad discretion vary. As such it is worth briefly reviewing 3 decisions to gauge the approach the court’s take in the very practical exercise of deciding whether it is appropriate to wind up a company; Giacobbe & Anor v Giacobbe & Anor  VSC 285, Warner v Global Pacific Aerospace Pty Ltd & Anor  VSC 291 and White Family No 1 Pty Ltd v Organic Brands Pty Ltd & Anor  VSC 247.
Giacobbe & Anor v Giacobbe & Anor  VSC 285
Michele and Antonio Giacobbe, brothers, went into business in 1962 manufacturing and selling office furniture. In October 1974, a family trust was established and the furniture business became an asset of the trust. The beneficiaries of the trust were the two brothers and their respective family members. In the early 1980s, Michele and Antonio fell out with one another. They did not see or speak to one another since 1991. Despite this, the furniture business continued in operation until 2003, at which time it closed.
The only remaining trust assets were three properties at Airport West which have been valued at more than $1 million. The properties did not generate an income. The Trust had an overdraft liability and ongoing liabilities for rates and taxes in relation to the properties. The trust no longer carried on any business. Each side the family held 50% of the shares and made allegations against one or more members of the other branch of the family concerning their conduct. The difficulties experienced in managing the trust due to the poor relationship included late payment of a number of debts, including rates and expenses associated with the properties and a failure to agree on the appointment of an agent to offer the properties for lease.
The Court ordered the company be wound up and cited the following as a basis for making such an order:
- although the company has been able to function as trustee of the trust for over 20 years its continued operation had become untenable.;
- the level of antagonism and distrust is such that there is no prospect of holding a constructive shareholders meeting for the purpose of appointing future directors. There has been a complete breakdown in the relationship between the two shareholders;
- although there were valuable assets in terms of the Airport West properties, the bank account was close to its overdraft limit; the properties were not generating any income yet expenses continued to accrue;
- a liquidator would be well placed to investigate allegations of inappropriate payment of moneys from the bank account and other relevant allegations concerning the trust that have been made by the parties against one another;
- a liquidator would also be in the best position to investigate and determine what action ought be taken in relation to the trust and the trust property;
- a liquidator would be independent of the two family factions;
- the company does not have an ongoing business that might be affected adversely by the appointment of a liquidator.
Warner v Global Pacific Aerospace Pty Ltd  VSC 291
Bruce Warner and Anton Beckerath were directors of Global Pacific Aerospace Pty Ltd, each holding 50 ordinary shares in Global Pacific Aerospace. The application to wind up was made on the grounds that Mr Warner, in his capacity as a director, acted in his own interests rather than in the interests of the members of the company as a whole and that he acted in a manner that is unjust or unfair to other members of the company. The company did not operate an ongoing business. The directors were at loggerheads and their relationship had irretrievably broken down. Each of Mr Warner and Mr Beckerath made allegations of breach of director’s duties against the other.
As a result of the very serious allegations made by each director against the other the court found the preferable course was for a liquidator who is independent of the disputants to investigate the allegations and to determine whether any claim should be brought against either of them.
White Family No 1 Pty Ltd v Organic Brands  VSC 247
The company was incorporated in March 2007. Its directors, Judith White and Margaret Smith, each owned five shares. On 20 August 2010, Ms White transferred them to the plaintiff, which is the trustee of Ms White’s family trust. After two years the relationship between Ms White and Ms Smith deteriorated markedly. There was no prospect that Ms White and Ms Smith could continue to operate an enterprise together and that the affairs of the company are deadlocked.
The affairs of the company were in disarray. Ms White asserted that there had never been a meeting of the directors of the company since its incorporation while Ms Smith contended that informal meetings occurred. Ms Smith regarded the company’s accountants as being partisan to Ms White’s interests and for that reason she opposed their involvement in bringing the financial records to order. The company’s books were incomplete and it was not possible to state what its present financial position was. It ceased trading in around August or September 2010. It never filed an income taxation return and its Business Activity Statements were overdue.
The court found it unnecessary to make findings about who was right and who was wrong in the disputes that have arisen. It made the following findings in support of an order to wind up the company:
- The relationship between Ms Smith and Ms White had broken down irretrievably and the continuation of the enterprise would be a futility.
- there is no chance of reconciliation between them such that they will be able to conduct the company’s business as a commercially viable enterprise.
- The accusations they made against each other with regard to the conduct of the company’s affairs revealed complete mistrust and disharmony between them.
- They were not capable in of communicating with each other with regard to the conduct of the company’s affairs. It was not even possible to convene a mediation. The situation went beyond mere disagreement as to how the affairs of the company should be run. There is clearly a mutual lack of confidence in the conduct of the company’s affairs.
- The company was constituted as a proprietary limited company and its constitution provided for a restriction on the ability of the shareholders to transfer their shares. Aside from a buy-out, which was not practicable, there is no mechanism for one or the other to exit the company.
Galanopoulos v Moustafa & Ors  VSC 380
The plaintiff and the first defendant were directors of AI Constructions Pty Ltd as well as equal shareholders. The parties could not get on. There were mutual accusations of wrongdoing. The inadequacy of the books and records of the Company was a relevant factor. The plaintiff was to some extent been excluded from the decision-making process of the Company. Each party accused the other of being responsible for the state of affairs and the fact that there were mutual accusations was sufficient to highlight the fact that the parties were deeply deadlocked and could not continue going forward with the Company.
The court found there was a lack of confidence in the management of the affairs of the company in light of the state of affairs, including the state of the books, records and documents. There was a management deadlock that prevented the Company from pursuing any cause of action
It is relevant to refer to the following decisions which were referred to in some of the decisions:
In Australian Securities & Investments Commission v Kingsley Brown Properties Pty Ltd Mandie J (as his Honour then was) summarised the relevant principles as follows:
I discern in the cases recognition of the following pertinent principles and criteria, which I adopt:
1) lack of confidence in the conduct and management of the company’s affairs lies at the foundation of applications for winding up on the just and equitable ground;
2) the classes of conduct justifying an order are not closed and there is no necessary limit to the generality of the words ‘just and equitable’;
3) the facts or conduct which make it just and equitable must have a direct or immediate relationship to, or bearing upon, the management or administration of the affairs of the company or the subject of its business (“a sufficient nexus”);
4) fairness was a relevant criterion thus freeing the Court, where appropriate, from technical considerations of legal rights;
5) relevant public interest considerations included the protection of investors and the prevention or condemnation of repeated breaches of the law;
6) a stronger case might be required where the company was prosperous, or at least solvent, and/or where there was an established business being carried on.
In Tomanovic v Argyle HQ Pty Ltd Austin J stated that the elements that must generally be satisfied:
 First, 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. Thus, it has been held that winding up on the just and equitable ground may be appropriate:
(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”: Johnny Oceans Restaurant Pty Ltd v Page ..;
(c) there is a “serious and operative state of mistrust and disharmony” between incorporators: McMillan v Toledo Enterprises International Pty Ltd …;
(d) where the relationship between incorporators “has completely broken down”, such that the company “could not continue to function meaningfully”: Malandris v Palmreef Pty Ltd (Unreported, FCA, Mansfield J, 12/3/1997, BC9701374) at 5;
(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” (Loch v John Blackwood  AC 783, at 788; quoted with approval in Stapp v Surge Holdings Pty Ltd  FCA 545, at ) or (expressed another way) “it is impossible for the partners to place that confidence in each other which each has the right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it” (Re Yenidje Tobacco Co Ltd  2 Ch 426; quoted with approval in Ruut v Head (1996) 20 ACSR 160, at 162). Consequently, unfounded lack of confidence should not of itself support a winding up.
(g) mere disagreement is insufficient to ground a winding up order: See Carpenter v Carpenter Grazing Co Pty Ltd (1987) BC8701391 at 23-27.
 Secondly, 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 …..