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Oppression Remedies for Minority Shareholders

Oppression Remedies for Minority Shareholders

 

All, too, will bear in mind this sacred principle, that though the will of the majority is in all cases to prevail, that will to be rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.

Thomas Jefferson
First Inaugural Address, 4 March 1801

  1. Statutory Remedies for Minority Shareholders

The notion of majority rule is a fundamental concept in the corporate landscape but it contains an inherent risk of abuse. In closely held companies, where shareholders are often involved in the management of the company, there is a potential for conflict between the decisions of the majority shareholders and the interests of the shareholders as a whole.

Cases have shown that disputes between shareholders may result in an irretrievable breakdown in mutual trust and confidence or a deadlock in the management of the company. In such cases, the law provides some remedies for minority shareholders to ensure efficiency and fairness. One of the most widely used statutory remedies available to shareholders is found in Part 2F.1 of the Corporations Act 2001 (Cth) (“the Act”).

Under section 232 of the Act, the court is empowered to give relief against oppressive conduct of a company’s affairs if it is of the opinion that:

(a)   the conduct of a company’s affairs (as defined in section 53); or
(b)   an actual or proposed act or omission by or on behalf of a company; or
(c)   a resolution, or a proposed resolution, of shareholders or a class of shareholders of a company;
is either:
(d)  contrary to the interests of the shareholders as a whole; or
(e)   oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity.

Section 461(1)(e) of the Act also provides a ground for compulsory winding up where the directors “have acted in the affairs of the company in their own interests rather than in the interests of the company as a whole”.

  1. What constitutes oppression?

A mere failure to agree between majority and minority shareholders, by itself, is not usually sufficient to demonstrate oppression. The court is required to examine all of the relevant facts and circumstances in order to determine whether the conduct under scrutiny has resulted in some harm or prejudice, which is not “reasonably or commercially justifiable”: Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14 at [48].

What constitutes conduct “contrary to the interests of the shareholders as a whole” is an objective test and determined by reference to “whether the conduct adheres to accepted standards of corporate behaviour or is in accordance with how reasonable directors would act in attending to the affairs of the company”: Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534; [2002] NSWSC 640 at [41].

For example, where a majority shareholder’s dominant purpose in raising capital through a share issue is to reduce the proportional shareholding of the minority, unfairness and oppression may be established: Strategic Management Australia AFL Pty Ltd & Anor v Precision Sports & Entertainment Group Pty Ltd & Ors [2016] VSC 303 at [148]

Depending of the circumstances of the case, the following may also constitute oppressive and unfairly prejudicial conduct:

  • Improper diversion of corporate business.
  • Improper exclusion from participation in the management of the company.
  • Misappropriation of company funds in breach of fiduciary duty.
  • Payment of excessive remuneration to a controlling shareholder or associate.
  • Failure to prosecute an action or improperly condoning a wrong done to the company.
  • Denial of access to company books and records.
  • Oppressive conduct of board meetings.
  • Making decisions for the benefit of related companies rather than shareholders in the company.
  • Improper action to remove or appoint directors.
  • Dilution of shareholders’ interests.
  • Unfairly restricting dividends.
  • Abusive of voting power by the majority in altering the company’s constitution.
  • Use of company funds to defend oppression proceedings.
  1. Who may apply for relief?

An application for an order under section 233 of the Act in relation to a company may be made by:

(a)   a shareholder of the company, even if the application relates to an       act or omission that is against:
(i)  the shareholder in a capacity other than as a shareholder; or
(ii)  another shareholder in their capacity as a shareholder; or
(b)   a person who has been removed from the register of shareholders     because of a selective reduction; or
(c)   a person who has ceased to be a shareholder of the company if the application relates to the circumstances in which they ceased to be a shareholder; or
(d)   a person to whom a share in the company has been transmitted by will or by operation of law; or
(e)   a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into:
(i) the company’s affairs; or
(ii) matters connected with the company’s affairs.

  1. What forms of relief are available?

Under section 233 of the Act, the court has discretion to make “any order that it considers appropriate” in relation to the company, including an order:

(a)   that the company be wound up;
(b)   that the company’s existing constitution be modified or repealed;
(c)   regulating the conduct of the company’s affairs in the future;
(d)   for the purchase of any shares by any shareholder or person to whom a share in the company has been transmitted by will or by operation of law;
(e)   for the purchase of shares with an appropriate reduction of the company’s share capital;
(f)   for the company to institute, prosecute, defend or discontinue specified proceedings;
(g)   authorising a shareholder, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings         in the name and on behalf of the company;
(h)   appointing a receiver or a receiver and manager of any or all of the company’s property;
(i)   restraining a person from engaging in specified conduct or from doing a specified act;
(j)   requiring a person to do a specified act.

In choosing a remedy, the court will generally make an order “to put the company back on the rails and avoid the causes of conflict and oppression”: Vigliaroni & Ors v CPS Investment Holdings Pty Ltd & Ors [2009] VSC 428 at [85]. The purpose of granting the remedy under the oppression provisions is to “bring an end to the oppression and to compensate the person oppressed fairly”: Vigliaroni at [85].

A winding up order may not be the preferred remedy where the company is solvent and trading profitably. In that event, the court may make other orders including an order for the majority to purchase the shares of the minority at a value to be determined by the court.

Whether you are a minority or majority shareholder, it is important that you seek professional advice and take proactive steps to resolve any shareholder disputes as and when they arise.  Our experienced lawyers can guide you through this process and provide the most appropriate legal advice for your circumstances.

Important disclaimer: The material contained in this article is of a general nature only and is based on the law as at 2 March 2017. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this article we recommend that you seek professional advice.

Pinar Acay

ASSOCIATE

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AirBnB leaves a tenant AirBnBust

Landlords who do not want their residential properties used for short-term stays have recently been given the upper hand when the AirBnB ambitions of a couple of unlucky punters were swiftly put on ice in the recent decision of Swan v Ueker [2016] VSC 313 from the Supreme Court of Victoria.

The what

The respondents were the tenants of an apartment in St Kilda in Victoria who, with dreams of eager travellers with fists full of cash, listed the apartment on AirBnB for short-term stays of between three and five nights.

The landlord, clearly unhappy at the sheer ingenuity of her tenants (or perhaps just a Collingwood supporter), promptly sought an order for possession in the Victorian Civil and Administrative Tribunal, arguing a breach of a provision of the lease prohibiting the apartment being sub-let without first obtaining the written consent of the landlord. The tenants, not content to duck for cover, countered with the argument that they were not sub-letting, but merely licensing the leased premises.

The why

In considering the lease -v- licence debate, the Tribunal dismissed the landlord’s application, finding that the tenants had only granted the AirBnB guests licences to occupy and not a lease because the guests did not have exclusive possession and therefore had not breached the lease agreement.

Happy days, the footy season is hotting up and the tenants have some urgent AirBnB business to attend to. Well, not so fast sunshine. The landlord took the matter on appeal and won! The Supreme Court of Victoria, in finding for the landlord, granted her order for possession and the tenants were given their marching orders.

Croft J, in delivering judgement, expressly states that “this is not a case on the merits of AirBnB arrangements. Neither is it a case on whether or not AirBnB arrangements might be said to be illegal”.

Whether or not a short-stay arrangement can be said to be a breach of a lease agreement must be decided on the facts relevant to each matter and notably, the decision only relates to short-stay arrangements for the whole of the premises and not only a room.

The what now

The fallout for tenants from this case is that potential short-term stay arrangements like an AirBnB weekend stay are likely to be considered a lease and not a licence to occupy when the whole of the property is occupied. This may result in a breach of the tenant’s lease agreement and may also be contrary to the provisions of the relevant state residential tenancy legislation such as section 238(2)(a) of the Residential Tenancies and Rooming Accommodation Act 2008 (QLD) which states that a tenant can sublet the premises only if the lessor agrees in writing.

JHK Legal has extensive experience dealing with leasing issues and one of our lawyers would be happy to review your lease and provide you with appropriate advice on your situation.

 

Clinton Bothma

ASSOCIATE DIRECTOR

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How powerful is the Australian Taxation Office? Very, according to Directors Penalty Notices!

 A Directors Penalty Notice (DPN) is the Australian Taxation Office’s (ATO) response to non-compliant companies, where directors fail to arrange the payment of company taxes and employee superannuation. After years of cracking down on companies who repeatedly fail to meet their reporting obligations, defaulting on payment arrangements or experiencing escalating debt with no real prospects of reducing liabilities and most importantly those who revert to phoenix activities, legislation has enabled the ATO to recoup and sanction directors.

1.0          Lockdown and Non-Lockdown DPN

Since amendments were undertaken in June 2012 in the form of Division 269 in Schedule 1 of the Taxation Administration Act 1953 (TAA), the ATO has been empowered to issue two types of Notices:

  1. A Standard or ‘Non-Lockdown’ DPN; and
  1. A Lockdown DPN.

2.0          Non-Lockdown DPN

A Standard or ‘Non-Lockdown’ DPN refers to a Notice issued by the ATO to each and every director of the company for non-payment of an outstanding liability arising from the lodgement of Business Activity Statements (BAS) and/or Instalment Activity Statements (IAS). The outstanding debt would relate to Pay as You Go (Withholding) liabilities (PAYG) and / or Superannuation Guarantee Charges (SGC).

When you receive a Standard or ‘Non-Lockdown’ DPN, you will be given three options; one of which needs to be complied with within the 21 day allocated period upon receipt of the Notice, provided that reporting obligations have been met. Your options include:

  1. Paying the outstanding debt or entering into a payment arrangement to have the debt paid; or
  2. Appointing a Voluntary Administrator to the company; or
  3. Winding the company up.

3.0        Lockdown DPN

Alternatively, a Lockdown DPN refers to a Notice issued by the ATO to each and every director of the company for failure to lodge PAYG and/or SCG returns within three (3) months of the lodgement due date. Unfortunately, for directors this DPN is an automatic liability that arises, which inhibits their ability to appoint a voluntary administrator or liquidator to a company to avoid liability.

In these circumstances the director will either need to pay the debt, enter into a payment arrangement to settle the debt or, if neither option is achievable, enter into personal bankruptcy. Furthermore, Lockdown DPN’s are scarily dangerous as there is no time limit on when they can be issued; most importantly, if you have already placed your company into voluntary administration or have wound up the company, a Lockdown DPN can still be issued at a later point in time from the ATO.

A few other issues arise from having a Lockdown DPN issued:

  1. The TAA empowers the ATO, under s260-5, to issue garnishee notices to third parties who are indebted to you, these debtors include banks or employers or trade debtors, to pay a percentage of your wage or income or even seek to have a lump sum payment paid out; and
  1. As no lodgements were made, an exact figure with respect to the amount of unpaid liabilities would be unavailable, therefore pursuant to subdivision 268B of Schedule 1 of the TAA the ATO is empowered to estimate the outstanding PAYG and/or SCG. If the ATO were to take this route, a Notice is to be provided to the company illustrating their ‘reasonable estimates’. These estimates become due and payable and can lead to further issues if not paid, including but not limited to wind up proceedings pursuant to s459 of the Corporations Act 2001 (Cth) and then subsequently action against the director(s).

4.0          Defences 

Notwithstanding the above, pursuant to s269-35 of Schedule 1 of the TAA, defences to DPN’s are available. However, establishing a defence in certain circumstances is quite difficult and legal advice should be sought as further supporting evidence will be required.

The first available defence to directors is due to illness or some other valid reason, whereby it would be unreasonable for the director to have taken part in the day to day management of the business, and that they did not take part during the period that the DPN relates to. This is a broad defence, due to the requirement of establishing  ‘some other good reason’, and this could encompass multiple defences depending on specific circumstances.

The second defence, and somewhat controversial, is if the director/s took all reasonable steps to:

  1. Ensure the company complied with its PAYG and/or SCG obligations;
  1. Ensure that an administrator was appointed to the company under the Corporations Act 2001 (Cth); or
  1. Ensure the company was wound up.

Alternatively, it is a defence if the director can establish that there were no reasonable steps that the director could have taken to ensure abovementioned circumstances took place.

In Roche v Deputy Commissioner of Taxation [2015] WASCA 196, it was established that defining what was ‘reasonable’ was an objective test and that it must be ascertained that the director took all reasonable steps he or she knew or ought to have known. It was also agreed that merely considering one of the three steps mentioned above would not suffice to establish the defence.

It is, therefore, imperative in order to avoid DPN’s or to be able to establish a defence for a DPN that directors meet their duties and obligations by:

  1. Lodging all your BAS, PAYG, SGC and other business reports on time, and any outstanding lodgements are done within three months of the lodgement date;
  2. Regularly enquiring about their company’s PAYG and SGC obligations and how best to meet them;
  3. Ensuring company processes and protocols are up to date and adhered to with respect to their PAYG and SGC obligations;
  4. Continuously monitoring your company’s financial position;
  5. Ensuring all your company registered address and ASIC details are up to date; and finally
  6. Getting proper legal and financial advice to make sure that your company is in the best position possible.

If you are worried about getting or believe that you may be liable for a Directors Penalty Notice, have been issued with a Directors Penalty Notice and are unsure of what to do next or would like further details about how JHK Legal can assist you in optimising your company, feel free to contact us anytime; our friendly staff are more than willing to help!

 

Reem Nassef

LAWYER

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Case Summary – Sanderson As Liquidator Of Sakr Nominees Pty Ltd (In Liquidation) V Sakr [2017] NSWCA 38

The Court of Appeal has recently handed down a decisive and ground-breaking judgment in the case of Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr [2017] NSWCA 38 with respect to liquidator remuneration.

This issue has been contentious recently, as there is currently an  inconsistency between the courts as to how liquidators’ remuneration is to be calculated and assessed.

The Case

The Court of Appeal has allowed the appeal brought by applicant Mr Clifford Sanderson, being the liquidator of Sakr Nominees Pty Ltd (in liquidation). Sanderson sought appeal from the order made by the primary judge of the Equity Division, which determined his remuneration at a total of $20,000.

Facts:

Sakr Nominees Pty Ltd is described by the primary judge as being a ‘small family company.’  In 2012, the company was wound up and Sanderson was appointed as liquidator. The company has real property, which was realised by the liquidator, and the secured and unsecured creditors were paid out by December 2014.

However, following the sale of the property further work was undertaken by the liquidator, which the liquidator submitted was necessary. For this work, the liquidator claimed fees, and sought approval from the Court for those fees.

Findings:

The primary judge[1] found that remuneration should not necessarily be allowed at the liquidator’s firm’s hourly rates, but calculated the fees based on an ad valorem assessment: essentially an assessment that is calculated by way of percentage with reference to the size of the liquidation in question.

Appeal decision:

The Court of Appeal, in overturning the judgment, found that the Corporations Act does not require a different approach for calculating remuneration on small liquidations, and that calculation of remuneration should have reference to both proportionality and the work done and complexity of said work.

What we can take from this case:

This case identifies that both time-costing and ad valorem remuneration have their own benefits and detriments. It confirms the position that ad valorem on its own as a calculation method will not be acceptable, but that liquidators’ remuneration should be calculated with reference to each of proportionality, amount of work done, and the complexity of that work. This is an important decision for liquidators, especially those undertaking complex or extensive work which can be necessary, even in smaller liquidations.

 

[1] in relying on previous decisions of himself, such as Re AAA Financial Intelligence Ltd (in liquidation) (No.2) ACN 093 616 445 [2014] NSWSC 1270 at [45].

Sarah Jones and Elyzia Menounos

LEGAL PRACTITIONER DIRECTOR AND LEGAL ASSISTANT

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What happens when you go bankrupt?

In today’s volatile economy, where increasing financial pressures are being faced by Australian businesses, personal bankruptcy appointments continue to rise. Often, the financial struggle in ensuring that all debts are paid to creditors can be a tough and gruelling process with unsuccessful results. What follows is usually the appointment of a bankruptcy trustee to the debtor whether voluntarily or as sought by a creditor. If you find yourself in this predicament, then it is important that you understand the implications of being bankrupt including some of the limitations that will be placed on you whilst bankrupt.

Upon becoming bankrupt a trustee in bankruptcy is appointed to administer your estate and realise assets so that the proceeds can be distributed amongst your creditors.

  1. INCOME

When you are bankrupt there is a limit on how much income you can earn before you will have to contribute some of that income to your bankruptcy trustee, who will in turn distribute it amongst your creditors.

The amount you can earn before mandatory contributions are made, will vary according to the number of dependants relying on you.

Currently you can earn the following amounts per year (after tax) before contributions are to be made to your bankruptcy trustee:

Number of Dependants Income Limit
0 $54,736.50
1 $64,589.07
2 $69,515.36
3 $72,252.18
4 $73,346.91
Over 4 $74,441.64

 

You are not prohibited from earning more than the amounts set out above, however 50% of the income you earn that is above the amounts earned in a year while you are bankrupt are required to be paid to your trustee for distribution.

  1. PROPERTY

Whilst bankrupt there is a limit on the assets that you can own. Of significant note is that if you are bankrupt you cannot own real property (i.e – your home) and if you do own real property before becoming bankrupt, your trustee will either take steps to sell the property and take what would have been your share of any sale proceeds (after payment to any mortgagee) for the benefit of your creditors or alternatively, your trustee will liaise with any mortgagee on the property so that the mortgagee takes steps to sell the property.

If you owned real property with another person before going bankrupt your trustee is only entitled to your share of the property and often the trustee in the first instance will liaise with the other owner to enquire as to whether he or she can purchase your share of the property from the trustee. If the other owner of the property can’t raise enough funds to buy your share of the property, then your bankruptcy trustee is entitled to take steps to have the property sold.

A common misconception is that real property can be transferred out of an impending bankrupt’s name prior to bankruptcy as a means for the property to be protected. This is incorrect and a bankruptcy trustee has powers to set aside transactions whereby assets were transferred or sold prior to bankruptcy under value or without any value at all.

Turning to personal property such as motor vehicles, equipment, furniture and other personal items, the bankruptcy legislation outlines a limit on the type of personal property that can be owned and the value of such items. For example you cannot own a motor vehicle with more than $7,700.00 in equity in the vehicle, otherwise the trustee can sell the vehicle. You can keep tools and equipment up to the value of $3,750.00 used to earn income. You are entitled to keep most ordinary household items.

We do highlight that under the bankruptcy legislation there is protected property which a trustee is not able to realise some examples of this are monies held in a superannuation fund and the right to recover damages for personal injury suffered by you.

  1. OBTAINING CREDIT and RUNNING A BUSINESS

If you are seeking to purchase goods or services on credit, then if the value of the credit is more than $5,574.00 you will have to disclose to the credit provider your status as a bankrupt. Further, whilst you are bankrupt, it will be very difficult for you to run a business as a sole trader as the trustee will be entitled to the assets of that business. If involved in a partnership before becoming bankrupt, then once bankrupt that partnership will dissolve. Finally, you will not be able to be a director of a company while you are bankrupt.

Another important consideration is that once you are bankrupt it will be very difficult to obtain finance or credit from a financial institution in the future without the assistance of others, such as a guarantor. This is on the basis that the bankruptcy will have a significant negative impact on your credit rating being an indication of the risks in your ability to repay a debt. As a bankrupt your name will permanently appear on the National Personal Insolvency Index, which can searched by third parties.

  1. DEBTS

The driving force behind becoming bankrupt is not being able to repay your creditors. As such on the discharge of your bankruptcy you will be released from the majority of your debts. We highlight that secured creditors can still take steps to realise the assets that they are secured over despite your bankruptcy, such as mortgagee over your house or a motor vehicle financier. We also highlight that bankruptcy does not provide a release to some debts such as any child support or maintenance, court imposed fines and penalties and any HECS or HELP debt owed for student loans.

We also note that if you incur any further debts after you have been declared bankrupt, then you will still be liable for these debts on the expiry of your bankruptcy.

  1. TERM OF BANKRUPTCY

If you become bankrupt, then the duration of your bankruptcy will be 3 years from when you lodge with your trustee a statement of affairs, which sets out all your assets and liabilities. There are ways to have your bankruptcy terminated earlier than the 3 year period which includes creditors agreeing to compromise their debts for a lesser amount or alternatively you can pay out all creditors in full including any costs of the trustee.

It is important that if you enter bankruptcy you work with your trustee in bankruptcy and assist with any queries he or she may have about your estate. If a bankrupt fails to take steps requested by the trustee, then the trustee could lodge an objection to the discharge of the bankruptcy which means that your bankruptcy will be extended.

We do highlight that later in 2017, new bankruptcy legislation amendments are set to take effect which will lead to significant changes across the insolvency landscape. One major change that will be introduced is reducing the term of a bankruptcy from 3 years to 1 year.

  1. TRAVEL

When you are bankrupt, you will need the approval of your trustee to travel outside of Australia. Usually your trustee will query who is funding any trips outside of Australia, the intended return dates and assessing whether you are a flight risk before approving the travel.

  1. VOIDABLE TRANSACTIONS

As highlighted earlier a trustee can investigate transactions that took place before you entered bankruptcy to ascertain whether proper consideration was paid in any transaction and whether any creditors have been preferred over other creditors when receiving payments from you. Under these transactions there are a number of conditions that need to be evident in order for the trustee to have a claim.

We understand that entering bankruptcy can be a daunting concept for anyone and can be a really hard decision to make. We have highlighted  some of the important issues for you to think about before commencing bankruptcy and so that you can be properly prepared and to assist in the overall bankruptcy process. In the event that you or someone you know is struggling to pay their debts when they fall due and are considering bankruptcy options then one of our lawyers will be more than happy to sit down with you and provide legal assistance where necessary and assist you with process.

 

Patrick Hanrahan

LEGAL PRACTITIONER DIRECTOR

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