Oppressive Conduct – Resolving A Deadlock In A Company With 50/50 Shareholder Directors

oppressive conduct

It is not uncommon for a deadlock to arise in companies established with equal shareholders who are also directors. If not quickly resolved such deadlocks can cripple the management and operation of a company.

This NSW Supreme Court case is an illustration of the power of a Court to make appropriate orders to resolve such a deadlock under section 232 of the Corporations Act 2001 (Cth) [oppressive conduct in the affairs of a company].

Background

Mr Munstermann and his company owned 50% of the shares in QIA Group Pty Limited; Mr Rayward and his company owned the other 50%.

There was no shareholders agreement.

Mr Munstermann and Mr Rayward were the only directors of QIA.

They agreed that an irreconcilable deadlock had arisen in the ownership and management of QIA.

Mr Munstermann contended that:

  • Mr Rayward had conducted himself in QIA’s affairs in a manner that was contrary to the interests of the members of QIA as a whole and oppressive or unfairly prejudicial to Mr Munstermann and his company as shareholders of QIA;
  • the Court should order that, pursuant to section 232 of the Corporations Act 2001 (Cth), Mr Rayward and his company sell their shares in QIA to him.

Some of the conduct proved against Mr Rayward included:

  • unjustified billing of QIA for work Mr Rayward did not perform
  • attempting to unilaterally create a role for himself as QIA’s financial controller at a salary 5 times more than the existing financial controller
  • refusing to, or significantly delaying the payment of QIA’s creditors and staff wages and superannuation
  • workplace bullying
  • informing the company’s bank that the company’s bank accounts were to be operated only with his, as well as Mr Munstermann’s authority
  • unilaterally attempting to close QIA’s bank accounts and cancel QIA’s credit cards
  • requiring that all payments, including for minor items such as staples, be approved at minuted director’s meetings
  • insisting that he review every dollar planned to be spent before approving bank transfers
  • sending an email to all staff to the effect that QIA did not have sufficient funds to pay their superannuation, when that was not the case
  • refusing to accept Mr Munstermann’s appointment as managing director, when Mr Rayward had proposed Mr Munstermann’s appointment many years earlier
  • refusing to authorise financial statements and budgets
  • proposing an “immediate recovery plan” which involved Mr Munstermann’s salary being reduced by 53% from $170,000 to $80,000 and his wife’s salary being reduced by 41% from $85,000 to $50,000.

Legal principles

The Court summarised the relevant legal principles:

  • The test of oppression is an objective one of unfairness.
  • The Court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly.
  • A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director.
  • Conduct of a company’s affairs may be oppressive even though the conduct is otherwise lawful.
  • Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole.
  • A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used.
  • The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined as at the date of the hearing.
  • The discretion under s 233 is wide as to the appropriate remedy.
  • The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive.
  • The aim of any order under s 233 must be to put an end to the oppression.
  • The court should only look to wind up an otherwise solvent company as a “last resort”.
  • As a remedy for oppression, an oppressor can be ordered to sell their shares to the oppressed party.
  • If an order is to be made for the purchase of shares under s 233 the task of the court is to fix a price that represents a fair value in all the circumstances.

The result

The Court found that this was a clear case of a director and equal shareholder of a company acting contrary to the interests of the members of the company as a whole, and acting in a manner unfairly prejudicial to the other shareholder.

The Court held that Mr Rayward was the cause of the deadlock, which had come about because, following Mr Rayward’s decision to retire as a director of QIA and sell his shares to Mr Munstermann, they could not agree on a price.

In cross-examination Mr Rayward agreed that his conduct was “part of an overall plan to leverage his way into a situation where there could be a buyout”.

The Court held that it was appropriate for Mr Rayward to be removed from the management and ownership of QIA in favour of Mr Munstermann.

Orders

The Court made the following orders:

  1. Mr Rayward and his company sell their shares in QIA to Mr Munstermann at the price to be determined by the Court as the fair market value for those shares as at 31 January 2017.
  2. Mr Rayward tender his resignation as a director of QIA in writing with immediate effect.
  3. Mr Rayward take all necessary steps to remove himself as a signatory and/or authorised person on any accounts held by QIA with any bank or financial institution.
  4. Mr Rayward repay to QIA the full amount of his director’s loan from QIA.
  5. Mr Rayward return all property of QIA to QIA, including a motor vehicle.
  6. Mr Rayward and his company pay the costs of Mr Munstermann and his company of the proceedings.

Citation

The case is Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133.

For another case involving oppression by a 50% shareholder see my article: WA Supreme Court precedent on whether a 50% shareholder can be oppressed under s 232 Corporations Act 2001

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