When any of us start or enter into business it’s always with the goal of success in mind. Two or more people, who are often friends or business associates start with a shared vision or ideas and it progresses from there.
There are many situations where businesses flourish but there are occasions when tensions can arise between the directors and shareholders of a business. Sometimes there can be situations when one director thinks that the other is not giving equal time or has lost interest in the business. Sometimes it can be as simple as a disagreement or a difference in opinion on the management or strategic focus of the business. Questions of transparency and the reliability of financial and other corporate information can become matters in dispute, occasionally to the point where an exit from the business is contemplated. It’s unfortunate but the reality is that this can happen so let’s take a moment to think about what the next steps could look like.
In cases such as these, the first port of call should be a review of the company’s constitution and/or any shareholders agreement that may exist. These documents may include protocols for dealing with a misunderstanding or a disagreement regarding certain matters. It is unfortunate but, a lot of disputes within a business arise because of the failure by the parties to be clear about the way they will deal with a dispute on key issues within their business including, a failure to even have some of these important key documents in place.
One of the most common questions we are asked by clients going through a dispute with their co-directors and shareholders is “how do I remove this director and force them to sell their shares to me?” Whilst a negotiated solution is in all parties’ interests, unless provided for in the company’s constitution or shareholders agreement, a director of a proprietary company cannot be removed unless there is a resolution of the shareholders and a shareholder’s shareholding cannot be reduced without their knowledge, consent or authority.
If a negotiation is not able to be achieved, litigation through the Court process may be necessary. The most common options available when this occurs include:
- An “oppressive conduct” proceeding under the Corporations Act 2001 (“the Act”)
- A proceeding for breach of a director’s duty
- Winding up proceeding.
Let’s understand more about what these options mean.
In an oppressive conduct proceeding, a Court can grant relief when the conduct of the company’s affairs is contrary to the interests of the members as a whole. That is, where an act, omission or resolution (actual or proposed) made by a company is considered oppressive, unfairly prejudicial to, or unfairly discriminatory against, a member or members.
This court proceeding can include conduct such as an unfair distribution of dividends or using company funds for improper purposes. In case of oppression, the Court may order to wind up the business, or order to regulate the conduct of affairs.
Breach of Director Duties
The standard expected of directors of a company is high. There are three sources of director duties, included within the Act, fiduciary, statutory and principal. Fiduciary duties through common law and statutory duties are outlined in legislation. Principal duties include but are not limited to, the duty of care, skill and diligence, the duty to act in good faith and in the best interests of the company and the duty to exercise powers and use information for a proper purpose.
A breach of any director duties is conduct by which a Court proceeding can be initiated. Criminal and civil penalties can be ordered against a director breaching these duties.
Section 461 of the Act provides that a Court may order the liquidation of a company. However, judges are reluctant to order the winding up of a company with well-established case law principles that “the winding up of a successful and prosperous company is an extreme step, and one which must require a strong case” (see Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 at 494).
The Courts must consider the following factors prior to making any such determination:
- The relationship between the shareholders/directors and effect on the operation of the company;
- The status of the company’s financial position and business activities;
- Whether there is alternative relief available to an aggrieved director/shareholder.
It’s important to note that such Court proceedings can be costly, time consuming and can severely impact the business and financial state of the company. Having key documents in place from the start of your business is crucial and invaluable in the unlikely event that an disagreement arises between directors. In the event that an issue does arise, and the key documentation is not in place please remember that is it is always in all parties’ interests to negotiate and engage in alternative dispute resolution processes prior to the commencement of any Court proceedings.
At Burke & Associates Lawyers, our commercial lawyers can assist in helping to set up the key documentation for your business but in the event that you have an issue to resolve our disputes lawyers have an extensive depth of experience in helping to navigate a dispute or litigation matter including engaging in alternative dispute resolution processes on your behalf.
If you need advice about your business structure, need support regarding a business or company dispute or would like to find out how our corporate lawyers or dispute lawyers can assist you, please don’t hesitate to contact our office on +61 3 9822 8588.
Insight by Rosy Roberts