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Federal Court discretion in ordering the wind up of a company – relief for unfairly treated director

A recent decision in the Federal Court considers judicial discretion to order the winding up of a company in a situation where it is the only course of relief for an unfairly treated director.

The case of Miao v I Need A Massage Pty Ltd [2019] FCA 1199 is the nightmare story for every director, these are the facts:

  • Ms Miao and Mr Luo were both directors and shareholders of the company (I Need A Massage Pty Ltd) which was used to purchase and operate a massage business.
  • The directors contributed equally to the purchase of the business and therefore received equal shares in its income and contributed equally to its expenses.
  • Following a dispute between the parties, Mr Luo locked Ms Miao out from the business, removed her as a director of the company and altered the company’s share register to reduce her shareholding to nothing.
  • The company later sold the business and the proceeds of that sale were retained by Mr Luo.
  • Ms Maio had no knowledge of Mr Luo’s conduct. She had not provided consent nor given authority for these actions to be taken.
  • Ms Maio made application to the Federal Court claiming that Mr Luo’s conduct was oppressive and seeking orders that she have access to the company’s financial records, company meeting minutes, that the ASIC register be rectified and that the company be wound up.

The Decision:

  • The Federal Court found in favour of Ms Maio and held that Mr Luo had engaged in oppressive conduct.
  • The Court ruled that Mr Luo did not have the ability to remove Ms Miao as a director of the company, reduce her shareholding and sell the business without her consent.
  • As a result, the Court ordered the winding up of the company with His Honour Justice Reeves noting that “winding up the company and appointing a liquidator to it is the only course by which Ms Miao may obtain some relief from the unfairly prejudicial manner in which Mr Luo conducted the company’s affairs.”

A link to the decision can be found here (https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2019/2019fca1199).

Important take away points for directors:

  1. As a director of a proprietary company, you cannot be removed or, you cannot remove another director unless there is a resolution of the shareholders.
  2. You cannot reduce a shareholder’s shareholding without their knowledge, consent or authority.
  3. Judges are reluctant to order the winding up of a company. There are 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).
  4. However, the Court will exercise its discretion to wind up a company in considering the following factors:

(a)  The relationship between the shareholders/directors and effect on the operation of the company;

(b)  The status of the company’s financial position and business activities;

(c)  Whether there is alternative relief available to an aggrieved director/shareholder.

Our Litigation & Alternative Dispute Resolution team at Burke & Associates Lawyers are able to assist in all areas of business and contractual disputes, breach of director duties, shareholder and corporate partnership disputes and disputes in relation to the Corporations Act 2001 (Cth).

Please do not hesitate to contact Meghan Warren or Rosy Roberts today.

Contacts

Meghan Warren

Principal

Meghan Warren

Principal
LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Kristy Muhlhan

Principal

Kristy Muhlhan

Principal
LL.B (Hons) GRAD DIP. L.P., GAICD.
Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

Rosy Roberts

Principal

Rosy Roberts

Principal
LL.B (Hons) B.A GAICD
Rosy has extensive experience in Litigation & Alternative Dispute Resolution having represented clients in all Victorian State Courts and the High Court of Australia. She is also a VCAT appointed Administrator.

Anthony Burke

Consultant

Anthony Burke

Consultant
B.A LL.B DIP.FIN. MGT
Tony is an LIV accredited business law specialist and a VCAT appointed Administrator. In 2008 he was President of the Law Institute of Victoria and served for two years as a director of the Law...

Stewart Davis

Associate

Stewart Davis

Associate
LL.B (Hons) B.Com
As well as property law, Stewart has had exposure to VCAT administration matters and commercial law, particularly servicing developer clients.

George Hanger

Associate

George Hanger

Associate
LL.B BA
George was admitted to legal practice in May 2015 after completing a Bachelor of Arts at the University of Melbourne and a Bachelor of Laws at Monash University.

Antonela Graso

Paralegal

Antonela Graso

Paralegal
Whilst completing her professional business and law tertiary qualifications, Antonela provides efficient and effective legal support services to our valued teams and clients.

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