"Fair play" and winding up on the just and equitable ground

06 February 2018

A recent decision of the Supreme Court of Queensland1 has confirmed that, in the context of a shareholder dispute:

  • A disgruntled shareholder cannot seek to invalidate company decisions by deliberately rendering a meeting inquorate or otherwise seeking to cause procedural irregularity;
  • Section 1322(2) of the Corporations Act 2001(Cth) (Act) is concerned only with whether the procedural irregularity causes injustice, not whether the company decision is itself unfavourable; and
  • The misconduct of a shareholder has serious consequences for an application by that shareholder to wind up the company on just and equitable grounds.
The Background

A dispute arose between the shareholders of a company (CPM). The sole Director of CPM was the representative of the minority shareholder (Minority), and fell into dispute with the majority shareholder (Majority).

At the request of Majority, the Director (as he was required by the constitution) convened a general meeting of CPM (EGM) to consider resolutions for his replacement as Director by representatives of the Majority.

Because the resolution would remove the Director from control, he sought to avoid it from coming into effect. He did that by deliberately taking steps to render the EGM irregular, including through the logistical arrangements for the meeting. They included:

  • The Director convened the EGM to be held on 24 December 2016, a Saturday and Christmas Eve;
  • The meeting was to be held at the offices of the Director’s solicitors, who were located in a CBD office building;
  • Despite the Director convening the EGM, he did not attend the EGM. This meant a quorum was not present;
  • The representatives of the Majority attended the meeting, and could not gain access to the solicitors’ office;
  • Notwithstanding, the representatives of the Majority proceeded with the EGM (in the building foyer) and passed the resolution;
  • Under the constitution of CPM, absent a quorum, the EGM was to be adjourned by 7 days – also a Saturday and this time, New Year’s Eve; and
  • The representatives of the Majority also attended on this date, and again could not gain access to the solicitor’s office.

The Minority subsequently asserted that the resolution was invalid because of the absence of a quorum. The Majority brought an application in the Supreme Court of Queensland seeking, inter alia, declarations pursuant to section 1322(2) of the Act, that the resolutions passed at the EGM were valid (the 1322 Application).

The Minority subsequently filed an application in the same proceedings for orders that CPM be wound up pursuant to section 461(1)(k) of the Act, on the just an equitable grounds (the Winding Up Application).

The Winding Up Application

The Minority asserted that CPM should be wound up because it and the Majority were in a ‘quasi- partnership’ and there had been a breakdown in the relationship to the point where CPM’s business could not proceed.

The application was refused. His Honour Martin J found there was no such ‘quasi- partnership’, and, of more significance, any breakdown in the relationship was caused by the Director’s misconduct. This included:

  • Changing CPM’s bank account authorisations; and
  • Withdrawing significant funds from CPM.

His Honour determined the Court would not wind up an otherwise liquid company where one shareholder had failed to uphold its obligations.

The 1322 Application

Section 1322(2) of the Act operates so that a procedurally irregular meeting will be upheld unless an invalidating order is made by the Court on the basis of substantial injustice.2

His Honour determined that, given the deliberate failure of the Minority to attend the EGM, no such substantial injustice occurred arising out of the procedural irregularity.

The Minority further asserted that the resolution as passed was itself unjust. His Honour held that this was irrelevant to an order made under section 1322 of the Act. The procedural irregularity itself, being the failure of the Minority to present at the EGM, did not cause substantial injustice.

This was in circumstances where the Minority had been given sufficient notice of the EGM (as the Director had called the EGM) and of the proposed resolutions. Further, even if the Minority had decided to attend the EGM, the resolutions would have likely have been passed because the Majority held the majority of shares.

His Honour declared the resolutions to be valid.

What does this decision mean for companies?

Until this decision, Queensland Courts had not properly considered the relief available to shareholders, in circumstances where shareholders deliberately render meetings inquorate to avoid unfavourable outcomes. The decision has confirmed, that:

  • Part A: A deliberate procedural irregularity is amenable to relief under section 1322;
  • Part B: Section 1322 of the Act cannot be used to invalidate merely unfavourable outcomes; and
  • Part C: Misconduct by an applicant, which contributes to a breakdown in the relationship, will affect the prospects of success when seeking equitable relief for the just and equitable winding up of the company.

This article was written by David O’Farrell, Partner, and Katrina Pagey, Special Counsel, in our Brisbane office.

1Citi Project Marketing (Qld) Pty Ltd and Anor v VG projects Pty Ltd and Ors [2017] QSC 65.
2Brien v Australasian Memory Pty Ltd.  

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