Category Archives: Oppression

Use of s 1324 to restrain a director from appointing an administrator

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Section 1324 of the Corporations Act 2001 (Cth) is cast in very broad terms and, in my opinion, is a provision which is sometimes overlooked. As a separate issue, I am sure other practitioners working in the insolvency and commercial law space, will have come across cases of deadlock or shareholder oppression in an SME, where the threat is made – or even acted upon – to appoint a voluntary administrator to a company, in what is suspected to be a scorched-earth strategy.

While we cannot know and I do not suggest any such strategy was at play in this particular case, that aspect aside, these two issues otherwise came together in March of this year in an interesting ex tempore judgment of Black J of the NSW Supreme Court. In that case, s 1324 was used to seek an injunction restraining a director from appointing an administrator for what was claimed by the applicant to be an improper purpose – In the matter of O’Neill v Advantage Hearing Pty Ltd [2013] NSWSC 175.

I will set out here in full just three of the sub-sections of the provision. Sub-sections (1) and 4) are relevant to the case now discussed. Sub-section (10) is not, but it is the sub-section of 1324 which in my view tends to be over-looked, although last year there was an interesting s 1324(10) decision in Queensland by the Full Court of the Queensland Supreme Court in May (McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129, see in particular [21]-[40]). So while it is not relevant here, I also reproduce sub-section (10) below, merely to draw attention to it.

Sub-sections 1324(1) and (4) provide as follows –

“(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, conselling or procuring a person to contarvene this Act; or

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.”

“….(4)  Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).”

I recommend readers also pay attention to the other sub-sections, most notably sub-sections 1324(6) and (7), to fully appreciate just how wide the powers under this section were cast, by the legislature.

Skipping ahead, sub-section 1324(10) goes on to provide the Court with an additional, potentially far-reaching power –

“(10)  Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.” 

In this case a recently-removed director of a company called Advantage Hearing Pty Ltd, Mr Matthew O’Neill, issued proceedings seeking interlocutory and substantive relief against the company itself, a director Ms Rhonda Hughes, and another person with an interest in the company, Mr Soeren Iversen, and associated entities. The company was trustee of the Advantage Hearing Trust, which appeared to conduct a hearing assessment business. While there was controversy as to the circumstances, Mr O’Neill’s employment had been purportedly terminated and he had been removed as a director. However there were problems with the application, including as to service of the affidavits in support, the defendants did not appear, and the evidence did not properly establish all that was needed to found the claim for interlocutory relief.

The plaintiff Mr O’Neill sought an order under s 1324 that, until final hearing or further order, Ms Hughes be restrained from appointing an administrator under Pt 5.3A of the Act. Black J observed (at [3]) that the steps necessary to establish such relief “would seem to be” –

1. That there is at least a serious question that the company is not in fact insolvent or likely to become insolvent, so that the appointment of an administrator is inappropriate;

2. Implicitly, that the appointment of an administrator for an improper purpose would not only be invalid but also a contravention of the Act, for example, of Ms Hughes’ duties as a director; and

3. That a basis for interim relief under s 1324 of the Act is established, in that the balance of convenience favours interim relief.

The threat of appointment of a voluntary administrator was said to emerge from a letter from the defendants’ solicitors to Mr O’Neill’s solicitors. The letter discussed proposals to resolve the dispute between the parties. It noted that if no resolution was reached, the third defendant Mr Iversen was likely to call in a loan he had made to the company, which would render the company insolvent, and Ms Hughes would then have no alternative but to appoint an administrator. Mr O’Neill’s solicitor responded, contending that the appointment of an administrator would not be for a proper purpose, and that there was no basis for the threat of that appointment because the loan was not repayable until February 2016 under the terms of the loan deed.

His Honour considered the first letter to be inadmissible, as subject to the “without prejudice” privilege, and that it would follow that the response from Mr O’Neill’s solicitor would also be subject to the privilege.

However, even if he was wrong on that and the letters were admissible to establish a threat of the appointment of a voluntary administrator, his Honour found that the basis for the interlocutory relief sought was not established, because –

(1) The evidence did not establish, as Mr O’Neill contended, that the loan could not be called on. Mr O’Neill sought to rely upon the loan being treated as non-current in the balance sheets. The deed he relied upon was unsigned, undated and unstamped, and Mr O’Neill could give no evidence either that it was executed or that the parties had conducted themselves on the basis set out in it.

(2) There was no affirmative evidence as to the company’s solvency, which his Honour observed would at least require some scrutiny of its cash flow position, and no basis for a finding that the company was neither insolvent nor likely to become insolvent, such that a voluntary administrator could not properly be appointed. His Honour emphasised that he was not finding that the company was insolvent or likely to become insolvent. Rather, he was noting there was no evidence one way or the other, as to the company’s solvency.

As Black J astutely observed (at [8]), there may be a real question as to whether a Court would, without clear evidence of solvency, restrain the appointment of an administrator under s 436A, where the provision for such appointment is important to the mechanism for reconstruction of potentially insolvent companies, and also allows directors to avoid potential liability or insolvent trading. A potential consequence of restraining the appointment of an administrator would be that directors would in fact be exposed to potential liability for insolvent trading, if a company then continued to trade in circumstances where it had been unable to appoint an administrator when it was in fact insolvent. However, I pause here to note that the defence to insolvent trading in s 588H(5), as further described in s 588H(6), does not require that a director succeed in appointing an administrator. It requires that the person “took all reasonable steps to prevent the company from incurring the debt” which, per s 588H(6) means the Court must have regard to matters which include, but are not limited to… “any action the person took with a view to appointment an administrator of the company”. If there was clear evidence that a director took steps or evinced a clear intention to have an administrator appointed to an insolvent company, but was prevented by injunction, it is difficult to see a Court rejecting the contention that the person met these requirements of the defence, subject to other relevant circumstances. As an example of another relevant circumstance – if there were other steps the director could have taken to prevent the company incurring the debt, and he or she did not take them either, I suggest the defence may be more likely to fail.

In any event his Honour found it was possible to resolve that aspect of the application on a narrower basis: a serious question had not been established that it would be an improper step to appoint an administrator, as it had not been established that the company was plainly not insolvent and unlikely to become insolvent (at [9]).

Black J pointed out that there were other avenues available to Mr O’Neil to address the position, if an administrator is in fact appointed for an improper purpose. Those protections being –

1. The administrator himself or herself has an obligation to at least take some steps to satisfy himself or herself as to the validity of his or her appointment, and in particular to review the terms of the resolution of the board by which he or she is appointed: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422.

2. More fundamentally, the Court has jurisdiction to scrutinise the reasons given by directors for the appointment of an administrator and, if they are not objectively established, the administrator will be removed and the appointment of an administrator for a collateral purpose is potentially a breach of directors’ statutory duties: see the authorities cited at Austin and Black’s Annotations to the Corporations Act at [5.436A]. Accordingly, if an appointment of an administrator is made in circumstances where it was not objectively justified, the Court has ample powers available to invalidate the appointment. Black J expressed the view that that course seemed to be preferable, as a matter of balance of convenience, than an interlocutory injunction, in that it does not expose directors to potential liability for insolvent trading if an injunction is wrongly granted. I suggest respectfully, however, that in some cases waiting for a threatened appointment before challenging it may not be seen as preferable for a company, depending upon what effect an appointment may have upon its significant contracts or banking facilities (see below).

Mr O’Neill also pointed to the appearance of recent changes to the company’s balance sheet, recording additional liabilities to Ms Hughes and Mr O’Neill. Those could be open to challenge, but Black J took the view that that challenge could properly be brought in an application to set aside the administrator’s appointment, or at a final hearing of the proceedings.

On the issue of balance of convenience, Mr O’Neill had also contended that there would be detriment to the company if an administrator was appointed, by reason of risk to a contract with a government agency, the Office of Hearing Services. However that contract was not in evidence, such that there was no evidence of the impact of such an appointment under the terms of the contract.

I pause here to note, as mentioned above, that in some cases the appointment of an administrator will place at risk if not a significant contract or contracts vital to the business’s revenue stream, but also  a company’s banking facility. Indeed, it is possible that an appointment of itself can render a company insolvent, when it previously was able to pay its debts as and when they fell due. The difficulty for the director who has been ousted from the company in these cases in terms of an ability to pre-empt and restrain threatened conduct, is that he or she is often unable to produce the necessary evidence to obtain the orders sought, because the other directors have shut him or her out of the company and are preventing access to the company’s books and records.

Here, Mr O’Neill sought further interlocutory relief, restraining the defendants from preventing Mr O’Neill having access to certain offices of the company, access to its books and records, taking certain actions in respect of its bank accounts, and having access to its computer server. However Mr O’Neill relied upon an affidavit of some months prior, following which the defendants had given certain undertakings (not detailed in the judgment). There were assertions and counter-assertions in the correspondence between the solicitors as to whether those undertakings had been honoured or breached. There was no further evidence to establish any breach, or to establish any occasion when access had been denied to Mr O’Neill.

Black J also declined to grant an injunction restraining the defendants from preventing Mr O’Neill from engaging in his duties as an officer and employee of the company, which relief was positive in substance (although s 1324(1) expressly provides for this), and one as to ASIC recognising Mr O’Neill as a director.

An interesting case and, as is often the case with injunction applications of any sort, one which in the end came down to the quality and sufficiency of the evidence.

Harding Investments PL v PMP Shareholding PL – shareholders oppression – postscript/update

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On 14 December last year I posted an update as to her Honour Justice Gordon’s third (30 November 2011) and fourth (8 December 2011) judgments in this case of shareholders oppression.  My earlier post can be seen here.

I noted at the end of my post that the respondents PMP Shareholding PL and others had filed an application to seek leave to appeal Gordon J’s substantive shareholders oppression judgment of 27 May 2011.

Their application was listed to be heard shortly after my post, on 16 December 2011. However the Federal Court  portal shows that on 15 December 2011, the respondents’ application to seek leave to appeal was dismissed by consent.

On a final note, to illustrate how this shareholders dispute over wastewater company Lotic Pty Ltd has been hard fought every step of the way, the Federal Court portal shows that on 2 March 2011 – in the lead up to the shareholders oppression trial  held in May and  on the same day that the respondents lost their application for security for costs – Lotic Pty Ltd (controlled by the respondents Don Gordon and Paul Dick) issued a statutory demand upon the applicant Harding Investments PL. Harding Investments PL succeeded in its application to have the statutory demand set aside on 16 May 2011 – just a day before the shareholders oppression trial proper commenced – and won yet another costs order in its favour. This, after the respondents had previously adopted what appears may have been a scorched earth stratagem of placing Lotic PL into voluntary administration on 8 November 2010, although the company subsequently executed a Deed of Company Arrangement and the directors resumed control of the company.  Those events are disclosed in Gordon J’s judgments of 2 March 2011 and  27 May 2011.

Finally, it would seem, after Mr Harding was summarily and wrongfully dismissed as CEO and removed from the Board in July 2010 by the other two directors (principals of the other two shareholder companies), after enduring 6 months of what her Honour Justice Gordon has held to have been conduct in breach of the shareholders agreement and shareholders oppression in contravention of s 232 of the Corporations Act 2001 (Cth), the end of this difficult chapter may be in sight.

Harding Investments PL v PMP Shareholding PL (No 3) – oppression – date for valuation of shares

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On 30 November 2011 Gordon J handed down her third judgment in the ongoing  and  acrimonious shareholders battle over the wastewater company Lotic Pty Ltd.

The first judgment in this dispute was a late and entirely unsuccessful security for costs application brought by directors Don Gordon and Paul Dick and their shareholder companies against the plaintiffs former director Steve Harding and his shareholder company. You can read her Honour’s 2 March 2011 security for costs judgment here.

The second was her Honour’s substantive judgment handed down on 27 May 2011 in the shareholders oppression action brought by Harding and company, against Gordon and Dick and companies. Her Honour found comprehensively in Harding and his company’s favour, as to shareholders oppression and breach of the shareholders agreement (in that case termed a “Business Succession Agreement”.   Gordon J ordered that the majority shareholder respondents purchase the Harding company’s shares in Lotic Pty Ltd and made orders as to the appointment of an independent valuer of those shares. In her Honour’s usual way, Gordon J sets out a useful distillation of the principles to be applied in a shareholders oppression case at paragraphs [5-10], and indeed I recommend the judgment to anyone practising in this area of law; it can be found here.

The judgment of 30 November 2011 related to the valuation of the shares and the appropriate date for their valuation to be assessed. I address here the latter issue. As usual, the respondents (who were ordered to purchase the shares) argued for dates which would result in a low valuation; the applicants for dates which would provide them a higher purchase price. In this case, the possible dates advanced by the parties as options, were –

  • 15 January 2010 – the date at which the oppression commenced,
  • 13 July 2010 – the date when Mr Harding was summarily, and wrongfully, dismissed as CEO and removed from the Board,
  • 30 September 2010 – the month these proceedings were issued,
  • 8 November 2010 – the date directors Gordon and Dick put Lotic into administration (sidenote – a Deed of Company Arrangement submitted by them and their companies was later approved by creditors),
  • 27 May 2011 – the date of the Court’s order compelling the share purchase by the majority shareholders.

The independent valuer appointed to value the shares in Lotic held by Harding Investments selected none of these dates, instead opting for 30 June 2011 as the relevant date for their valuation. He did so for these identified reasons –

  1. the date of the Court order compelling the share purchase was 27 May 2011,
  2. the share value should be at the closest possible date to the order to purchase date,
  3. Lotic’s financial year end is 30 June. Accordingly a full year financial performance of Lotic could be utilised in determining value, and
  4. 30 June 2011 was the closest possible date for which reasonably accurate financial information was available.

Her Honour accepted 30 June 2011 as the appropriate date on those bases. Her discussion of the legal principles to be applied as drawn from the authorities, and her application of them, is at paragraphs [8-16] of the judgment, which can be found here.

Gordon J directed the parties to make orders to give effect to her reasons by a certain date however, as has been a feature of this case throughout, the parties were unable to agree on anything at all, and her Honour handed down a fourth judgment on 8 December 2011 – here. In summary, her Honour made the orders proposed by the applicants Mr Harding and his company Harding Investments as to payment for the shares and delivery of the transfers. As with all the judgments in this sorry case, once again, the respondents were ordered to pay the legal costs of Harding and his company.

On a final note, the respondents Don Gordon and his company PMP Shareholding Pty Ltd and Paul Dick and his company Jashtra Holdings Pty Ltd have made a late decision to seek leave to appeal her Honour’s 27 May 2011 substantive shareholders oppression judgment referred to above. That application for leave to appeal will be heard later this week, on 16 December 2011. Watch this space.

Grego v Copeland – “oppression” – recent example of conduct constituting shareholders oppression

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Yesterday’s decision by Ferguson J of the Victorian Supreme Court in Grego v Copeland & Ors [2011] VSC 521 provides a good, classic illustration of what will amount to “shareholders oppression”, for the purposes of s 232 of the Corporations Act 2001 (Cth). As there can be divergent views as to what constitutes oppression, what goes far enough to “cross the line”, it is worth a quick review of this case.

The company in question, Jimmi Dexta Pty Ltd, engaged in the artwork design and supply of runners and shoes from 2004. The shareholdings and directorships of the company changed over time, but in the relevant period it was effectively a “corporate partnership” between 4 men, most of whom played an active role in the business. Mr Grego, the plaintiff, was the owner/director responsible for artwork and sampling, and he would travel to China to source supplies and wholesalers.

By May 2006, fractures in the parties’ relationships had appeared. The conduct Mr Grego complained of, which was held to constitute oppression, included –

(a)  a demand made in May/June 2006 to Mr Grego that he inject $160,000 into the company or else he would be removed as a shareholder and director. (He was subsequently removed as a director and his employment was terminated);

(b) failing to hold any meetings of members to which he was invited since June 2006;

(c) improperly excluding him from participation in management of the company; which was worsened by also –

(d) failing to make him a reasonable offer for  his shares;

(e) incorporating a new company and diverting assets of the company to it;

(f) failing or refusing to honour the company’s financial obligations towards him in his capacity as an employee. (This related to Mr Grego’s use of a personal American Express card for corporate purposes, and the company’s refusal after a certain point in time to reimburse him.);

(g) incorrectly characterising certain payments as shareholders’ loans, when in truth they were capital contributions, thereby reducing the value of shares and prejudicing Mr Grego [at 27-45 and 51].

Mr Grego also argued for an additional ground of oppression, that of denying him access to information about the company’s affairs. However this was held not to be proven. [at 26]

On appeal from a decision of an Associate Judge, Ferguson J upheld the decision at first instance, that oppression had been established. Her Honour held that it resulted from the cumulative effect of the conduct in question [at 5].

Her Honour summarises the relevant principles [at 47], observing that whether conduct is unfair or oppressive in a commercial company is assessed objectively through the eyes of a commercial bystander. Her Honour notes that conduct will be considered in its context, and while separate instances of conduct on their own may not be unfair, cumulatively they may constitute oppression.

It is not entirely clear from the judgment, but it appears that her Honour concluded that certain of the grounds listed above were on their own enough to constitute oppression, and certain grounds could only be characterised as oppressive when taken cumulatively together with the other grounds.

Others may take a different view, but on my analysis of the judgment, in particular the passage at [56-60], her Honour’s conclusions are these –

  • grounds (c) and (d) – the Associate Judge had held that taken together these two are enough, on their own, to constitute oppression [at 50]. This is consistent with authority (see Lord Hoffman in O’Neill v Phillips & Ors [1999] UKHL 24; [1999] 2 All ER 961). However her Honour appears to take the view [at 56-60] that it is the conduct described in grounds (c)-(g), taken together cumulatively, which amounts to oppression,
  • grounds (e), (f) and (g) – these on their own might not have amounted to oppression, but considered objectively in the context of the other conduct of the defendants, leads to a conclusion that there had been oppression,
  • ground (b) is only referred to in passing earlier in the judgment, but is not discussed by her Honour, and
  • ground (a)  is referred to curiously by her Honour at the end of paragraph [5] and again as an “in addition” matter at [60] and [75], as an additional ground, after holding that the other grounds taken together clearly constitute oppressive conduct. Her Honour remarks that this was unreasonable, but it is not entirely clear as to her Honour’s position. It is possible that her Honour’s intended meaning is that this conduct on its own, without needing to be taken cumulatively with the other grounds, constituted oppression.

Unsurprisingly, the defendant shareholders argued that their actions had been reasonable and within power. They argued that Mr Grego had not been performing well as an employee, that he was not bringing in any income to the company, that the relationship between Mr Grego and his co-directors had broken-down, and that accordingly it was in the best interests of the company that he be removed and that they had done so properly [at 53].  Their arguments were unsuccessful.

Ferguson J agreed with the orders of the Associate Judge for the purchase of Mr Grego’s share at a price of $32,142.86, for procurement of the release of the guarantee that he gave in favour of the NAB and for payment of the American Express card liability and interest [at 6].

In relation to the often contentious issue regarding the appropriate date for the valuation of the shares, there was two valuations in evidence. Predictably, the defendants argued for a later date, at which time the evidence indicated the value of the shares was negligible. However her Honour agreed with the Associate Judge’s date of 30 June 2007, that contended for by the plaintiff Mr Grego. Not all oppressive conduct had occurred by that date, but by that time the demand of $160,000 had been made, Mr Greg’s employment had been terminated, he’d been excluded from participation in management, no meaningful offer had been made by the other shareholders for his shares. [See 62-73] See the leading authority on this issue, the Victorian Court of Appeal’s decision of Foody v Horewood & Ors.

All in all, quite a typical case of oppression factually, and an interesting judicial assessment of what is enough to constitute oppression, for the purposes of s232 of the Corporations Act 2001 (Cth).