Kicked out of your own company? Federal Court finds in favour of oppressively and unfairly treated director

It is every director’s worst nightmare: a rogue co-director locks you out of your business, removes your directorship, reduces your shareholding to nil and absconds with company profits: all without your knowledge or consent. Unfortunately, this nightmare was the reality for the plaintiff in the recent Federal Court case of Miao v I Need A Massage Pty Ltd, in the matter of I Need A Massage Pty Ltd [2019] FCA 1199

The Facts

The plaintiff, Ms Miao and the defendant, Mr Luo were both directors and shareholders of the company, I Need A Massage Pty Ltd, which was used to purchase and operate a massage business in Brisbane. As part of this arrangement, the parties agreed to contribute equally to the purchase price of the business, thereby taking equal shares in its income and expenses. Approximately one year passed before Ms Miao and Mr Luo had a serious personal dispute which caused their business relationship to break down irretrievably. Following this dispute, Mr Luo took steps to lock Ms Miao out of the business, and subsequently removed her as a director of the company. A month later, Mr Luo altered the company’s share register to reduce Ms Miao’s shareholding to nothing. Finally, Mr Luo sold the company’s business and retained the proceeds of sale for himself. All steps were taken without Ms Miao’s knowledge or consent. Ms Miao claimed this conduct was “oppressive” under ss.232 and 233 of the Corporations Act 2001 (Cth).

Ms Miao applied to the Federal Court seeking orders that she be given access to financial records of the company, company meeting minutes, that the ASIC register be rectified and an order that the company be wound up.

The Decision

The Federal Court found in favour of Ms Miao, finding that Mr Luo acted without proper authority and in an oppressive manner.

Justice Reeves decided to exercise his discretion to order a winding up of the company under section 233(1)(a) of the Corporations Act 2001 (Cth), due to the fact that the conduct of the company’s affairs, namely Mr Luo’s act of removing Ms Miao as director, reducing her shareholding to zero and excluding her from the operation of the business was oppressive or unfairly prejudicial to Ms Miao as director and member of the company.

His Honour considered the fact that the winding up of a successful and prosperous company is not taken lightly, but instead requires a ‘strong case’. Nevertheless, His Honour found that winding up was justified because there were no other remedies available to Ms Miao for the unfairly prejudicial manner in which Mr Luo had acted and the company was not one which could be said to be “successful and prosperous”; the appointment of a liquidator was the only relief available to Ms Miao.

The Lessons

  1. A director of a proprietary company cannot remove another director unless there is a resolution of the shareholders;
  2. A director cannot reduce a shareholder’s shareholding without their knowledge, consent or proper authority to do so;
  3. Judges have demonstrated their reluctance to exercise their discretion to order the winding up of a ‘successful and prosperous’ company. However, if winding up is the only remaining and suitable avenue of relief for an aggrieved plaintiff, they are more inclined to exercise their discretion to do so; and
  4. The court is more likely to exercise its discretion to wind up a company if:
    • There is continuing animosity between the shareholders/directors, that would make continued operation of the company difficult if not impossible;
    • If there is a ‘real risk’ of further oppression; and
    • If the company’s present activities are very limited.[1]

If you are seeking advice on any disputes between directors or shareholders, contact our Business Team today.

[1] Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 at 494.

Written by Riley Berry and Maxine Viertmann