WA Supreme Court precedent on whether a 50% shareholder can be oppressed under s 232 Corporations Act 2001

oppression of 50% shareholder

The WA Supreme Court has held that there is no reason in principle why oppression for the purposes of s 232 Corporations Act 2001 (Cth) cannot occur to a 50% shareholder.  The case is Patterson v Humfrey [2014] WASC 446 (delivered 28 November 2014).

Facts

In 1997 Mr Patterson and Mr Humfrey incorporated Skybow Holdings Pty Ltd for the purpose of property development and investment.  The shares in Skybow were held equally by Mr and Mrs Patterson and their company Rodale Nominees Pty Ltd on the one hand, and Mr and Mrs Humfrey and their company Kenesta Pty Ltd on the other.  Mr Patterson and Mr Humfrey were the only directors of Skybow.

From the outset Mr Humfrey, with Mr Patterson’s consent or acquiescence, assumed the day-to-day control of Skybow.  Mr Humfrey carried out the management and other activities of Skybow through Kenesta, which activities included several property developments.

In 2012 differences arose between Mr Patterson and Mr Humfrey concerning the latter’s conduct of Skybow’s affairs.  In July 2012 a share sale agreement was made under which the Pattersons agreed to sell their Skybow shares to the Humfreys, however the sale was not completed because the Humfreys were unable to obtain finance for the purchase.

In December 2012 Mr Patterson proposed to purchase the Humphreys’ shares, however Mr Humphrey refused to sell because he was required to maintain a 20% shareholding in a property development through Skybow in order for Kenesta to continue to be the project manager and exclusive selling agent.

In July 2013 the plaintiffs, Mr and Mrs Patterson and Rodale commenced proceedings against the defendants, Mr and Mrs Humphrey and Kenesta, seeking orders under s 233 Corporations Act 2001 (Cth) (CA) on the ground that by reason of the conduct of Mr Humphrey or the defendants, Skybow’s affairs were being conducted in a manner which was oppressive, or alternatively unfair and discriminatory to the plaintiffs’ interests.

The plaintiffs alleged that Mr Humfrey caused Skybow to make unauthorised loans to Kenesta, to pay unauthorised management fees to Kenesta, and to pay or reimburse Kenesta’s expenses, being expenses that were not incurred by or payable by Skybow.  The plaintiffs also alleged that Mr Humfrey had failed to cause Skybow to keep proper records, and that in relation to one property development Mr Humfrey had misled the plaintiffs and diverted an opportunity to Kenesta which belonged to Skybow.

The plaintiffs sought orders that the defendants sell to them the defendants’ shares in Skybow, alternatively that the defendants buy the plaintiffs’ shares in Skybow.

The defendants denied any oppressive conduct under s 233 Corporations Act, and submitted that if any oppressive conduct was found that the defendants should purchase the plaintiffs’ shares.

Skybow had been inactive since 2012; it had $152,000 in its bank account but no creditors had been paid since the commencement of the proceedings.  It was unable to deal with creditors as both directors were required to agree.  Mr Humfrey refused to allow Mr Patterson to become a signatory on the company’s bank accounts.

Legal principles

Section 232(a) CA provides that a Court may make an order under s 233 if the Court is satisfied that the conduct of a company’s affairs is either:

  • contrary to the interests of the members as a whole; or
  • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

His Honour observed that there is no reason in principle why a 50% shareholder should be denied relief under s 232 CA (at [53]-[54]):

In general, the statutory power to intervene in the internal affairs of a company is necessary only where an applicant does not itself have the power to prevent oppression.  It would seem unnecessary to protect those who can control, by their majority shareholding, the affairs of a company against the oppression of others in the conduct of those affairs.  Justice Chesterman, writing extra‑curially, after reviewing relevant authorities, said that a careful reading of the cases shows that what disentitles a member or members of a company from complaining about oppression is not necessarily a majority of shares but a majority of votes.  A member who does not control a majority of votes may seek the court’s intervention:  The Hon Mr Justice R N Chesterman RFD, Oppression by the Majority – Or of it? (2004) 25(2) Aust Bar Rev 103.  As Justice Chesterman points out, when relief is withheld to majority shareholders it is because they were capable of acting, or causing the company to act, in such a way as to remove or overcome the alleged oppression.  What confers that power is the majority of votes.  In this case the plaintiffs were not able to cast a majority of votes at a general meeting so as to cause Skybow to act in such a way as to remove or overcome the alleged oppression.

Furthermore, Mr Humfrey exercised de facto control of Skybow.  Initially, Mr Humfrey assumed that role and Mr Patterson acquiesced in it.  Mr Humfrey has maintained and has possession and control of Skybow’s books and records.  Mr Humfrey has declined to permit Mr Patterson to be a co‑signatory to Skybow’s bank accounts.  No directors meeting can take place and no resolution can be made by Skybow without Mr Humfrey’s concurrence.  Mr Patterson is powerless to actively participate in the affairs of Skybow or to take any action to recover loans, management fees and other payments which Mr Patterson says Mr Humfrey wrongly caused Skybow to make to Kenesta.  In those circumstances it is open to the court to grant relief to the plaintiffs under s 233 of the Corporations Act notwithstanding that they hold 50% of the shares of Skybow.”

Findings

The Court found that in general Mr Patterson was an honest and straightforward witness (at [21]).  On the other hand the Court found that Mr Humfrey was an untruthful witness and in his business dealings Mr Humfrey engaged in dishonest behaviour and tax evasion (at [32]).

The Court also found that Mr Humphrey exercised his powers and discharged his duties without the required care and diligence, failed to exercise his powers or discharge his duties in good faith in the best interests of Skybow and for a proper purpose, and he acted improperly by using his position to gain an advantage for himself or Kenesta (at [188]).

Further, in a practical and commercial sense, by receiving unauthorised loans and management fees and issuing invoices and receiving payment from Skybow for expenses not incurred by, or for the purposes of Skybow, Kenesta acted in a burdensome, harsh and wrongful way that was productive of unfair prejudice to the interests of the Pattersons and Rodale (at [189]).

Accordingly the Court found that the conduct of Skybow’s affairs by Mr Humfrey and Kenesta was oppressive to, unfairly prejudicial to and unfairly discriminatory against the plaintiffs in their capacity as members of the company (at [190]).

His Honour noted that throughout the proceeding Mr Humfrey refused to acknowledge any wrongdoing, and that in a practical sense the oppressive and unfairly prejudicial conduct of Mr Humfrey had continued up to and during the trial of the proceeding (at [187]).

Relief

His Honour observed that the appropriate remedy was one which would regulate the affairs of the company in a way that avoided further oppression or unfair conduct; in this case the least intrusive and most appropriate relief was for one faction to buy out the other (at [197]) because (at [204]):

  • if the company was wound up it would be difficult to realise its principal asset for full value;
  • it was not feasible for the company to continue with its present shareholding given the complete breakdown in the relationship between Mr Humfrey and Mr Patterson, as a result of which the company had been dysfunctional since 2012, and because of Mr Humfrey’s past and continuing oppressive conduct.

As to who should buy out the other his Honour referred to Young CJ in Eq in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) ACSR 359 (Campbell) who said that the exercise of the discretion under s 233(1)(d) CA should be with a view to ending the oppression:

A buy out order is not to compensate for the shareholders’ loss (although it may have that effect), but to separate the oppressor and the oppressed, and so albeit unusually, can be an order that the oppressor sell to the oppressed:  Re A Company (No 00789 of 1987); Ex Parte Shooter (1990) BCLC 384; Re Brenfield Squash Racquets Club Ltd (1996) 2 BCLC 184 [122].”

His Honour further observed (at [199]) that:

  • in Fedorovitch v St Aubins Pty Ltd [1999] NSWSC 776; (1999) 17 ACLC 1558 Young J considered s 246 AA (the predecessor provision to s 232), and said the policy of s 246AA was that the oppressor is entitled to be released from the company if he finds that because of the opponent’s oppression he or they can no longer have their capital invested in it;
  • in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 Spigelman CJ described the remedy of allowing a minority to acquire the shares of a majority as “extraordinary and virtually unprecedented”.

The plaintiffs’ main contention as to why they should purchase the defendants’ shares was that the defendants would be unable to purchase the plaintiffs’ shares.  His Honour found that whilst the defendants may not have that capacity, the appropriate order was that the defendants acquire the plaintiffs’ shares, for 3 reasons:

  • it was consistent with the purpose of s 233(1)(d) CA that the oppressed are entitled to be released from the company if they find that because of the opponent’s oppression they can no longer have their capital invested in it;
  • Mr Humfrey had managed Skybow from its inception, brought projects to the company and managed its day-to-day affairs; in contrast Mr Patterson was in practice a passive investor;
  • Mr Humfrey was required to maintain a 20% shareholding in one of the property developments, which would be put at risk if the defendants were required to sell their shares to the plaintiffs, with no corresponding benefit to the plaintiffs.

His Honour ordered that the defendants have the first opportunity to purchase the plaintiffs’ shares within 28 days of the determination of a purchase price by a Registrar, failing which the plaintiffs have 28 days to purchase the defendants’ shares, with liberty to apply in the event that neither share transfer option eventuated.

Comment

This case appears to break new ground in respect of the application of s 232 CA to a 50/50 company, and should especially be considered in cases where such a company is constituted by a passive 50% shareholder who is oppressed by, inter alia, effective exclusion from the management of the company by the other 50% shareholder.

On oppression principles and 50/50 companies generally his Honour noted (at [52]) that it had previously been suggested by Young JA in obiter that there were conceptual difficulties in applying the oppression principles to a 50/50 company ‘unless there were at least individual strong arm tactics by the person who held the other 50%’ and that it was difficult to say that there had been oppression in a 50/50 company between two persons of equal strength of character; see Campbell at [387] to [395], and Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104; (2011) 288 ALR 310 at [321] which for interest are extracted below:

Campbell

“Can there be oppression in a 50/50 held company?

387   The present case differs from most cases brought under the section in that there is no minority. Each of the Campbell and Weeks interests has equal rights, hold 50% of the capital and are joint managing directors. Each has an equal right under Article 44 of the Articles of Association to call a meeting. Under such conditions, there can be no oppression using the administrative machinery of the company.

388   The only oppression that can exist is by a person overbearing a weaker individual. I use the word “overbearing” in a broad and loose sense. This is not oppression by a director as director and, thus, is a case where there must be continuing oppression at the date of hearing.

389   Mr Bannon was asked by me during argument whether he contended that one could not have a statutory oppression where the shareholders had an equal shareholding and were each directors.

390   Mr Bannon answered that he did not consider that he could do so on the authorities, saying that there might be a case where one person had such an overbearing personality that he could force everybody to bend to his will.

391   Although this part of the argument was not pursued, there is great doubt, based on cases such as Re Astec (BSR) plc [1998] 2 BCLC 556 whether “bullying” actions by majority shareholders outside formal meetings of directors or shareholders can constitute oppression in the affairs of the company. As Hollington says in his Minority Shareholders’ Rights, 3rd ed (Sweet & Maxwell, London, 1999) this sort of conduct is dehors the company, it is the personal conduct of a person who happens to be a director and does not constitute corporate conduct.

392   However, it must be pointed out that at [129] of her reasons, the primary judge said: “In the present case the defendants have not claimed or suggested that Campbell’s actions were on his own behalf. In any event I am satisfied that the conduct complained of was conduct by or on behalf of the Company”.

393   The English position seems to be that there may be oppression in a company which is equally held and where the parties are each directors at least: (a) in the situation where a person blocks the holding of meetings by wilful absence (Music Sales Ltd v Shapiro Bornsdtein & Co Inc [2005] EWHC 759; [2006] 1 BCLC 371); or (b) where the breaches of fiduciary duty by one party make for the situation that mutual confidence has been destroyed and that it is thus unjust that the quasi partnership continue; see eg Re Baumler (UK) Ltd [2004] EWCA Civ 53; [2005] 1 BCLC 92.

394   There does not seem to be much by the way of Australian authority on the point. Hogg v Dymock (1993) 11 ACSR 14 was a case decided under the Corporations Law in which a 50% shareholder complained of oppression by the conduct of the other shareholder in dismissing her from employment with the company, but there the other shareholder was a jointure of husband and wife who held the majority on the board.

395   I do not consider that much of consequence arises from this discussion.”

Tomanovic

“321    Thus we have the situation of a company which is a 50/50 company, that is, owned equally by two men. Then a decision is made that the two men will go their own way and each will operate part of the business that formerly was operated by the corporate entity in which they were virtually married. The company was a 50/50 held company and I observed in [Campbell], that there were conceptual difficulties in applying the oppression, etc principles in s 232 of the Corporations Act 2001 (Cth) to a 50/50 company unless there were at least individual strong arm tactics by the person who held the other 50%. It was not necessary to decide the point in Backoffice and none of the other judges in the High Court or this Court considered the matter. I think it would be unwise to decide it in this case when there has not been full argument on the point. I will, however, take into account as a factor that ordinarily it is difficult to say there has been oppression in a 50/50 company between two persons of equal strength of character.”

It is thus still an open question as to whether conduct amounting to “at least individual strong arm tactics” may fall within s 232 CA, particularly where a 50/50 company is constituted by 2 persons of “equal strength of character” (whatever those expressions may, with respect, mean).