Unfair Treatment of Shareholders addressed by Winding up Order

17 September 2023 in Business Law, Commercial Lawyers

The Corporations Act 2001 (Cth) is important in governing and regulating corporate conduct.

Section 461 provides a mechanism for addressing situations where there is unfairness, oppression or a breakdown of trust and confidence in the conduct of the company’s affairs. This article considers Section 461, and its significance and the grounds under which it empowers courts to order the winding up of a company.

The Purpose of Section 461

Section 461 serves as a safeguard for shareholders, creditors, directors and other stakeholders who are at odds with a company’s operations or management. It provides five distinct avenues through which the court may order the winding up of a company, each addressing different aspects of corporate misconduct:

1. Special Resolution

Under this provision, a company can be ordered to wind up by the court if it passes a special resolution to that effect. This reflects a scenario where the company’s shareholders collectively determine that winding up is the most suitable course of action.

2. Directors’ Self-Interest

If directors act in their personal interests rather than in the broader interests of the company, Section 461 empowers the court to intervene. This is crucial in preventing conflicts of interest that can harm the company and its stakeholders.

3. Oppression and Unfair Prejudice

The court may also make an order for winding up when a company’s affairs are being conducted in a manner that is oppressive, unfairly prejudicial or unfairly discriminatory against one or more members (shareholders). This provision protects the rights of individual shareholders from being unfairly overridden by a majority.

4. ASIC’s Opinion

The Australian Securities and Investments Commission (ASIC) plays a vital role in monitoring corporate compliance. If ASIC, through a report prepared under Division 1 of Part 3 of the ASIC Act, states that the company cannot pay its debts or that winding up is in the interests of the public, members or creditors, the court may make an order to wind up the company.

5. Just and Equitable

The “just and equitable” provision allows the court to order the winding up of a company when it deems it fair and equitable to do so. This broad ground ensures that courts can intervene in a wide range of situations where justice and equity demand it.

Defining “Just and Equitable”

The “just and equitable” ground is particularly noteworthy because it grants the court significant discretion. The cases in which this ground has been applied vary widely, demonstrating its adaptability to diverse circumstances. Recent legal cases, such as Macquarie Bank Ltd v TM Investments Pty Ltd, have provided valuable insights into the interpretation of this provision.

In the Macquarie Bank case, Justice Barrett ruled that the “just and equitable” ground encompasses situations involving serious fraud, misconduct or oppression within a company. In this instance, the directors’ mismanagement and misconduct diminished confidence in the company’s leadership to the point where continuing business operations became untenable.

The “just and equitable” ground does not necessitate that a company is insolvent or that its primary objectives are unattainable. Instead, it can come into play when there is a breakdown of trust, an insurmountable deadlock, a genuine loss of confidence or when commercial reality indicates that the company’s underlying purpose has failed.

It is important to note, however, that a mere breakdown or loss of confidence is not automatically sufficient to invoke this ground. The court will carefully assess the specific circumstances and commercial realities to determine whether winding up the company is the just and equitable solution.

The Role of Section 462

Section 462 complements Section 461 by outlining who can apply for the winding up of a company based on the grounds specified in Section 461. The list includes:

• The company itself
• Creditors, including contingent or prospective creditors
• Contributories (shareholders)
• The liquidator of the company
• ASIC
• APRA

How can BSM help?

Section 461 may provide a very useful mechanism for creditors or shareholders to address unfair or oppressive conduct by a company. Navigating the complex process of applying for a winding up order under Section 461 can be daunting. Our experienced team of lawyers is here to guide and support you every step of the way. We can assess the merits of your case, help you gather the necessary evidence, prepare a compelling application and represent your interests in court.