Are you and your business partners locked in a dispute, where the mutual trust and confidence that underpins the business relationship has been lost? Did you incorporate a company with other shareholders with an understanding as to how the business should be run, but now the business not running the way which it ought to be, and you are being excluded from management?
It is all too common to see companies resembling partnerships making collective decision unanimously, but eventually become paralysed over disagreements in varying aspects of the business. Such scenarios are often difficult to resolve, especially if both parties have equal control over the company, creating an impasse. In this case, one solution is to apply to the Court to wind up the company on “just and equitable” grounds.
Section 461(1) Corporations Act 2001 (Cth) sets out that:
The court may order the winding up of a company if:
…(k) the Court is of opinion that it is just and equitable that the company be wound up.
Some common scenarios where such impasses could result in a winding up order a company are highlighted below.
The concepts of deadlock and a lack of mutual trust are interrelated. It is particularly relevant when the state that the company is in now, could not have been contemplated by the parties when the company was formed.
In the leading case of Ebrahimi v Westbourne Galleries Ltd, [1] Mr Ebrahimi and Mr Nazar ran a successful business, each was a director and held an equal number of shares. When Mr Nazar’s son came of age, both business owners transferred some shares to him and he became a third director, but a breakdown in the relationship between all three ensued. Mr Nazar’s son sided with his father and together they removed Mr Ebrahimi removed as a director. While this was a valid exercise of voting powers held by Mr Nazar and his son, the Court granted a winding-up order in favour of the ousted shareholder (Mr Ebrahimi) as his expulsion from the business was outside of the parties’ contemplation when they became members of the company.
Similarly, in Mir v Mir, [2] three families came together to invest in properties through a group of companies. Resentment, caused by the increasing involvement of the next generation of the three families, resulted in a breakdown of relationship over time, and negotiations were held between the families to split the assets. The negotiations failed. The Court held that in such scenario, the “shareholder who has invested in a company on the basis that it will undertake a certain activity is entitled to recover his or her contribution if the activity becomes impossible”. However, a winding-up order was not granted as the properties were held by the companies as trustees – winding up the companies would not assist in this scenario and there are other orders which a Court can make to assist in dissolving the trusts.
Often, shareholders and directors can foresee a breakdown in their relationship, and attempt to negotiate a mutual separation of business interests. However, there are risks that the negotiation can break down or the only item the parties agree upon is that they have to separate.
Such was the situation in Tomanovic v Global Mortgage Equity Corp Pty Ltd, [3] where both parties agreed in principle to separate their business but had failed to finalise the separation agreement. The situation further became complicated when a business partner decided to become re-involved within the company. The court ultimately made a compulsory buy-out order of that other party’s shares, so as not to use the full destructive weight of a winding up order.
In Entwisle v Minken Pty Ltd (recs and mgrs apptd), [4] two equal shareholders entered into business for property development purposes. The relationship was quasi-partnership but they conducted the businesses through multiple companies. The relationship between the individuals broke down irretrievably. The parties had signed a Dissolution Agreement, but then alleged each other was failing to perform that agreement. It was also alleged that one party was conducting the affairs of the companies as if they were his (to the exclusion of the other) and that the companies were so mismanaged (for each of the companies there was outstanding tax and ASIC lodgements) that the companies ought to be wound up. The Court held in this case that it was just and equitable to issue a winding-up order.
It is not uncommon for equal business partners in a company to be in deadlock and require assistance to resolve the dispute or to seek orders to wind up of a company on ‘just and equitable’ grounds. Preventative action such as the preparation of a shareholders agreement to deal with deadlock provisions and buy out proceedings can help.
If your company falls within a situation broadly depicted above and you are seeking to wind up the business, or you have any questions in relation to this article, please reach out to the Business & Commercial team on 02 6274 0999. .
[1] Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.
[2] Mir v Mir [2023] NSWSC 408.
[3] Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104.
[4] Entwisle v Minken Pty Ltd (recs and mgrs apptd) [2013] VSC 709.