In most shareholder dispute cases involving allegations of oppression on the minority shareholders, relief is sought under section 233 of the Corporations Act 2001 (Cth) (the Act). This section provides that the Court may (amongst other things) order that a company be wound up. Accordingly, on its face, the provision enables the Court to wind up a company irrespective of whether it is solvent or otherwise successful.
Historically, the Court has shown a general reluctance to order that an otherwise solvent and functioning company be wound up. This approach, however, appears to be changing as demonstrated in the recent, significant decision of the Full Court of the Federal Court (on appeal) in Hillam v Ample Source International (No 2) [2012] FCAFC 73 (Hillam). In Hillam, the Full Court upheld the trial judge's decision to wind up a solvent company (yet to earn income, but with hopeful future prospects) in circumstances where the minority shareholder had been oppressed.
Sections 232 and 233 of the Corporations Act 2001
Section 233 of the Act empowers the Court to make any order that it considers appropriate in relation to a company in circumstances where the requirements of section 232 are met. That power includes making an order that a party purchases shares of another party with an appropriate reduction of the company's share capital or (as indicated above) an order that the company be wound up.
Section 232 of the Act provides that the Court has the discretion to make such an order (or any other order under section 233) if:
- the conduct of a company's affairs; or
- an actual or proposed act or omission by or on behalf of a company; or
- a resolution, or a proposed resolution, of members or a class
of members of a company;
is either:
- contrary to the interests of the members as a whole; or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. [emphasis added]
In the decision of Hillam, the Full Court heard an appeal of a trial judge's order that the second respondent, Bonython Metals Group Pty Ltd (BMG), be wound up pursuant to section 233 of the Act by reason of the oppression of a minority shareholder, Ample Source International Ltd (Ample Source). In considering the appeal, the Full Court addressed the issue of whether it was appropriate to wind up a solvent company.
Oppression on the minority shareholder
The trial judge in Ample Source International Ltd v Bonython Metals Group Pty Ltd; Re Bonython Metals Group Pty Ltd (No 6) [2011] FCA 1484 held that there were a number of instances of oppression of the minority shareholder, Ample Source. The oppression was brought about because of the way in which the affairs of BMG were conducted, specifically:
- the partial management of BMG in a manner which was commercially unfair to Ample Source;
- a failure or reluctance to provide relevant information to Ample Source;
- the fact that meetings were arranged in a manner which was not only in breach of the shareholder's agreement, but provided Ample Source with limited opportunity to attend the meetings either at all or with inadequate information; and
- that Ample Source was substantially excluded from the management of the company as a nominee director and was not appointed to participate in the management of the company.
The trial judge ordered that BMG be wound up under section 233(a) of the Act.
Buy Out
At trial, Ample Source sought primary relief in the form of a buy out of the majority shares in BMG. The trial judge rejected that claim, finding that there was no evidence of any realistic prospect of a commercially viable solution involving the acquisition of Ample Source's interest for fair value. In the alternative, Ample Source sought that the company be wound up which, as stated, was ultimately granted.
On appeal, the appellants took issue with whether the order to wind up the company was appropriate in the circumstances of the case.
In considering this question, the Full Court referred to the trial judge's finding that a buy out was not an appropriate alternative, highlighting the fact that there was no offer to buy the shares of the minority or of the majority at a fair price, whereas a liquidator could sell the assets on the open market and divide the proceeds, absent a sale of the company's assets to one of the disputing parties. The Full Court expressed its view that it was not only reasonably available to the trial judge to make such a winding up order, but "virtually inevitable" that that should happen.
Although a buy out was not a commercially viable solution in the particular circumstances of Hillam, it may be an appropriate solution in other shareholder disputes. If so, a valuer appointed to value the fair market value of a minority shareholding will need to consider whether a discount should be applied for the minority shareholding. In the case of MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167, the Court of Appeal held that it was inappropriate in the context of the case to apply a minority discount in the case of a valuation done on a net assets backing basis. The Court of Appeal held that:
"the majority shareholder has an interest in ensuring that the minority holding is not acquired by someone who has no relationship with the majority holder of mutual co-operation or trust... The majority holder will therefore be prepared to pay more for the minority shareholding than another person."
Wind Up – An Extreme Step
In support of their contention that the winding up order was inappropriate, the appellants in Hillam argued that the Court's discretionary power to wind up a solvent (and debatably, successful) company was to be exercised only as an extreme step. Here, the appellants relied upon the UK decision of Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 13 ALR 561 (Cumberland Holdings) in which Lord Wilberforce said: "to wind up a successful and prosperous company and one which is properly managed must clearly be an extreme step and must require a strong case to be made."
The Full Court held that the case of Cumberland Holdings did not support the appellants' arguments and it did not accept that the Court's discretion to wind up a company in circumstances of oppression was governed by an overarching principle that the winding up should only be ordered as an extreme step.
In considering the exercise of the Court's discretion under section 233 (and indeed, whether that discretion is subject to an overarching consideration as contended by the appellants), the Full Court expressed the view:
"An order to wind up a solvent company may often be too extreme a step to take (and therefore not justified or appropriate but that is very different from proceeding upon any "principle" or assumption that a winding up order of a solvent company is inappropriate. No such implication arises from ss 232 or 233 of the Act, or should be made in those terms. The real question is whether a winding up order was appropriate to deal with and address the grounds for relief which had been established. The answer to that question must be found in the facts of the particular case."
Conclusion
This judgment marks an important reminder that, in shareholder disputes involving oppression of minority shareholders, the Court will not shy away from ordering that a solvent company be wound up. The power conferred on the Courts by section 233 of the Act is a discretionary power that is not subject to overarching principles of fairness, commerciality or a general requirement to resort to winding up in the last instance. Rather, the power is wholly discretionary and, when exercised properly, is difficult to successfully appeal.
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