“Just and equitable” winding up: a viable cure for creditor distress and shareholder oppression

The Supreme Court of Victoria’s recent decision in Pacific Dairies Limited v Orican Pty Ltd[1] illustrates judicial unwillingness to interfere in shareholder disputes, even in cases involving management failure and doubts as to the company’s solvency. This case therefore exemplifies the utility of winding up applications on a “just and equitable” basis as an option for both dissident shareholders and dissatisfied creditors.

Background

The former CEO and minority shareholder of Pacific Dairies Limited (the Company), Mr William Clark, brought an application under s232 of the Corporations Act 2001 (Cth) (the Act) seeking the removal of the current directors and setting aside the issue of shares and options to the directors and their related entities.

Mr Clark sought to enliven the jurisdiction of the court under s232 of the Act by arguing that:

• the conduct of the Company revealed that since at least 2015, it had achieved none of its publicly announced goals to expand its core business;
• despite the Company’s rapidly deteriorating financial position, the Company had paid (via the share and options issues) extremely high directors’ fees and had made selective share issues to the directors without offering such issues to the shareholders at large.[2]

Decision

The Court held that while the question of whether a company has acted oppressively is ultimately assessed by reference to all of the circumstances, the Company’s conduct did not constitute oppression under s232 of the Act. Although much of the Company’s conduct could be fairly criticised as inadequate and poor stewardship and the Court agreed that the Company’s financial state was of concern,  Mr Clark could not establish that the conduct amounted to commercial unfairness or discrimination against members or that the conduct was contrary to the interests of the members as a whole. [3]

Among the matters cited by the Court in reaching this decision was the reluctance of courts to interfere with shareholder democracy, particularly in circumstances where no winding up application had been filed against the Company.[4]

Our Recent relevant experience

JWS recently encountered this interaction between the oppression and winding up remedies in Federal Court proceedings on behalf of California-based T-S Capital Partners, LLC (T-S Capital), a creditor and contributory of Paltar Petroleum Limited (Paltar).[5] In that case, T-S Capital was both a creditor and contributory and had serious concerns about the management of Paltar’s affairs which were not dissimilar to the concerns ventilated by Mr Clark in the Pacific Dairies case.

The distinguishing feature of the Paltar case is that rather than trying to meet the high threshold required of a shareholder oppression action, T-S Capital simply sought the winding up of Paltar on a “just and equitable” basis in reliance upon substantial evidence of management misconduct. That application was later amended to seek orders for winding up in insolvency in light of the manifest evidence which subsequently emerged of Paltar’s insolvency. A more detailed discussion of that case appears here.

Takeaway points

Both the Pacific Dairies and Paltar decisions exemplify the availability for dissident shareholders of a winding up application as a more accessible and effective alternative to oppression actions.

In addition, creditors who have well-founded concerns about the management of a debtor’s affairs may be able to resort to a winding up on a just and equitable basis, even if there is a present insufficiency of cogent evidence that the debtor is insolvent.