The Supreme Court, per Sifris  J, heard an application under sections 233 and 461(1)(k) of the Corporations Act 2001 in  Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14.

FACTS

Many oppression proceedings in the Corporations List involve family run companies.  Exton v Extons Pty Ltd is not unusual in this regard.  The First Plaintiff,  Peter, and the Sixth Defendant, Ian, are brothers. They each hold, either directly or indirectly, 50% of the shares in each of the companies that made up the Extons group. They are also directors of those companies [1].

The Extons group was commenced by Peter and Ian’s father and uncle in the 1950s, when it was started . It engages in earthworks, excavating and contracting in New South Wales and Victoria and occasionally sells machines including machines that it holds for the purposes of its contracting work [2].

Peter started working for the Extons group in 1974. Ian commenced working in about 1981. Peter and Ian bought out their brother, Graeme, in about 2010 [3].

In 2010 Peter and Ian divided the responsibility for conducting the business of the Extons group. With Ian involved in management and administration and Peter focusing on site management the group prospered [4]. Things changed in March 2015. In a disagreement over a job in Cohuna Peter complained that Ian that treated him as a mere works supervisor/machine operator. Peter suggested that they appoint a manager to manage the business [5].

According to Peter Ian refused to engage with him as an equal director and caused the affairs of the Extons group to be conducted, not only contrary to the interests of all members, but in a manner unfairly prejudicial to and unfairly discriminatory against him (and his company) as a member, director and employee of the Extons group [6].  He submitted, at [7],, which was denied by Ian, that throughout 2015 and into 2016 Ian engaging in conduct that is contrary to the interests of the Extons group as a whole by:

•  making payments to himself, his family and his friends;
• causing the Extons group to sell machines inappropriately; and
• causing the Extons group to neglect its ordinary contracting business.

Peter further claimed that Ian has humiliated him and unfairly discriminated against him by :

• telling suppliers that invoices must be signed by Ian;
• telling employees that Peter is not authorised to give instructions;
• trying to freeze him out of the conduct of the Extons group;
• no longer discussing business opportunities with him;
• being denied information and bank details for the Extons group;
• having the locks changed to the Extons group and refusing Peter access to keys;
• refusing to pay Peter’s sons for work which the Extons group has benefited from; and
• refusing to pay Peter for expenses incurred on the companies’ behalf; and
• withhold Peter’s salary payment for no reason [8].

Ian and his interests are sellers, wanting $12,000,000 while Peter and his interests are buyers offering $8,500,000 [17].

DECISION

The Court summarised the issues at [14] as:

In respect of each of Extons, Equipment, Mokoan, EEBB and Debt-Flow the principal issues are:

(a) whether Ian is conducting the affairs of the company in a manner that is:

(i) contrary to the interests of the members of the company as a whole; or

(ii) oppressive of, or unfairly prejudicial to, Peter; and

(b) whether:

(i) there has been a breakdown in the working relationship between the company’s shareholders precluding all reasonable hope of reconciliation, friendly co-operation and mutual trust and confidence between them; and/or

(ii) the company’s shareholders are deadlocked; and

(c) what order, if any, the Court should make.

The court, at [26], identified 4 issues:

• whether the grant of relief pursuant to s 233 of the Act is contingent on the oppressive conduct extending to the date of the hearing?
• pursuant to s 232(d) of the Act, what constitutes conduct ‘contrary to the interests of members as a whole’?
• pursuant to s 232(e) of the Act, what constitutes conduct oppressive to, unfairly prejudicial to or unfairly discriminatory against a member?
• whether the applicant’s conduct is relevant to an assessment of the alleged oppressive conduct of the defendant? I will consider these issues in turn.

The court noted that there is clearly a deadlock between the parties. This constituted the just and equitable ground for winding up (s 461(1)(k)).  A buy-out order is more appropriate for a solvent company only occurs if there is conduct contrary to the interests of members as a whole or conduct that is unfairly prejudiced to and unfairly discriminatory against a member. To do that requires evidence, usually, as in this case, detailed ‘tit for tat’ type evidence. If there are no such findings the companies are usually (but not always) wound up because of deadlock even though they are solvent and neither party wants (as their preferred option) this result. However, the Court does have a discretion [18].

Oppression claim

Ian particularised Peter’s conduct in support of a claim of oppression, at [21], as:

(a) Causing the Extons group to exclude Peter from the business (particular 1);

(b) Causing the Extons group to fail to tender for new work (particular 2);

(c) Causing the Extons group to make payments to Ian (particular 3);

(d) Causing the Extons group to make payment to Ian’s son (particular 4);

(e) Using the funds of the Extons group for the benefit of Ian (particular 5);

(f) Causing the Extons group to make payments to a related company TGH for the benefit of Ian (particular 6);

(g) Causing the Extons group to make payments to Burns Equipment contrary to the contemporaneous documentary evidence (particular 7);

(h) Causing the Extons group to sell machinery outside the ordinary course of business (particular 8);

(i) Causing the Extons group to enter into the Bulldozer 47 transaction, outside the ordinary course of the Extons group’s business (particular 9).

Not suprisingly Ian denied that his conduct was oppressive submitting, :

• Whatever previous conduct, there is no longer or no continuing oppression at the time of the hearing because, since 14 October 2016, Peter has effectively been in control of the Extons Group, at [22] ;
• on an objective assessment of the circumstances Ian has not engaged in any unfair conduct, at [22];
• oppression cannot be made out in relation to payments made to Ian because Peter agreed;
• management of the Extons business was a settled and accepted course of conduct, where roles and functions were sufficiently defined and carried out. Ian made various decisions in the best interests of the company notwithstanding some disagreement and disputation with Peter, at [22];
• Peter  refused, in March 2015, to work as site manager for work for which Extons had successfully tendered and from which Extons would have made a profit of between $300,000.00 to $600,000.00, and despite him being employed as site manager for an annual wage of $103,260.00;
• Peter continued refused to act as site manager, or at all, which reduced the range of work and jobs for which Extons could tender, at [23];
• Peter objectied to Extons’ tendering for work that Ian was quoting or taking steps to quote or tender for, at [23];
• Peter changed the locks at the Mokoan Quarry, at [23];
• Peter took equipment which Extons needed to perform work causing Extons to incur loss and costs, at [23];
• Peter took and used Extons’ equipment, fuel, crushed rock, bark, parts and labour, from 6 August 2015 to about 5 December 2015, to a total value of at least $30,907.00, at [23];
• Peter withdrew in February 2016 of the amount of $45,074.54, from an Extons bank account, at [23];
• Peter caused Extons to pay his personal expenses, at [23]; and
• Peter took bulldozer track chains from Extons’ depot on 29 May 2016, at [23].

Whether the oppression must extend to the date of the hearing

The Court found, at [34], that the sections are enlivened if the conduct occurs at any time and notwithstanding that it may have ceased at the time of trial. However whether the conduct has ceased will be of relevance in determining whether and to what extent orders should be made.

The meaning of the words ‘contrary to the interests of members as a whole’ (s 232(d))

After considering the authorities the Court stated, at [39], that  s 232(d) is separate and distinct from s 232(e) and that a breach may not necessarily involve commercial unfairness. The court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny is in the best interests of the company as a whole, apart from its members. Breaches of duty by directors and officers may well be conduct that is not in the best interests of the company as a whole. Where there is consent or ratification of such conduct, it may, in context and in the circumstances, not be contrary to the interests of members as a whole or indeed unfair.

Pursuant to s 232(e) of the Act, what constitutes conduct, oppressive to, unfairly prejudicial to or unfairly discriminatory against a member

The Court, at [48], stated that the critical issue is commercial unfairness, judged objectively, which usually results in some harm or prejudice that is not reasonably or commercially justifiable. That requires an examination of all of the facts and circumstances and context. Conduct that may appear unfair may be fully justified. Each case must depend on its own facts and circumstances.

Whether the applicant’s conduct is relevant to the alleged oppressive conduct of the defendant

At [49] the Court noted that the conduct of the applicant may well be a relevant, perhaps even the most relevant, factor in determining the nature and extent of any relief.

The court found that the oppression provisions were engaged, primarily based on 3 payments:

• TGH (Vic) Pty Ltd (‘TGH’), a company owned by Ian and his wife, received $335,012 diverted from Extons by Ian [56].  The court rejected, at [57], that Peter agreed or acquiesced in this course and the subsequent repayment of those monies confirmed the absence of any legitimate basis for their diversion.  The diversion of the funds was, at [58],  a breach of fiduciary and statutory duty and not in the best interests of Extons as a whole.

• Ian’s admission that he made payments to or for his benefit totalling $30,800.00 [63].  Because Ian claimed that Peter had used Extons’ equipment and resources, and material, to the same value this payment could therefore not be characterised as oppressive. The court rejected this submission and stated that the breach of duty is clear and it was of no assistance or relevance that the other director was also in breach. The breaches do not cancel each other out [65].

• the final payment constituting oppressive conduct was Ian’s payment to himself in April 2016 payments of  $45,074.54 [66].

Remedy for Oppression

The Court found that the only proper remedy in the first instance is a buy out [73] because:

• it was what the parties want.
• the evidence and conduct of the parties suggests that the present arrangements and shareholders should not continue given the deadlock and breakdown in the relationship.
• it was only a matter of time before there is further disputation

Section 461/467 claim

The Court declined to order that the company be wound up because there is, at this stage, another remedy desired by both parties [87].  There were other discretionary matters that tell against the making of winding up orders being:

• courts are “extremely reluctant to wind up a solvent company”[89] because of the potential adverse effect of winding up on employees [89]
• whether the party moving for a winding up order has clean hands and should obtain the order [90].

ISSUE

This case highlights both the strong preference of the court to prefer buy out orders where a company which has a dysfunctional management but is solvent.  The Court had no difficulties in finding that inappropriate withdrawals, constituting a breach of fiduciary duty, was a basis to find there was oppression.  When preparing a claim involving a deadlock and claims of mismanagement it is critical to carefully review the financial records and commercial transactions. Instances of casual withdrawals and cavalier conduct are often regarded, accurately, as breaches of fiduciary duties.