This case provides some useful guidance on some key aspects of oppression claims, and also illustrates that courts will be reluctant to wind up solvent companies, even where the parties are in deadlock and oppression has been established, in this case preferring to make buy out orders at a price to be determined. Even in family companies, a well drafted shareholders agreement can help to reduce the likelihood of costly litigation in the event of breakdown in the working relationship.
Brothers, Peter and Ian Exton, were directors of and each held 50% shares in the Extons Group companies (Extons Group). Following disagreement about the operation of the business, Peter pointed to alleged conduct by Ian as evidencing that Ian had caused the affairs of the Extons Group to be conducted contrary to the interests of its members as a whole and oppressive to Peter in contravention of sections 232 and 233 of the Corporations Act 2001 (Cth) (Act), and sought an order that Ian sell his shares to Peter.
On the facts, Sifris J in the Supreme Court of Victoria accepted that there was conduct by Ian which was caught by section 232(d) and 232(e) of the Act, including causing the Extons Group to make payments to him, using the funds of the Extons Group for his benefit and causing the Extons Group to make payments to a related company for his benefit.
In reaching his decision, Sifris J addressed 4 key issues relating to oppression claims:
- whether a grant of relief under section 233 is contingent upon the alleged oppressive conduct extending to the date of the hearing – Sifris J preferred the view that the relevant sections are enlivened if the conduct occurs at any time and notwithstanding that it may have ceased by the time of the trial (although whether or not the conduct has ceased may be relevant in determining whether, and to what extent, orders should be made);
- what constitutes conduct ‘contrary to the interests of members as a whole’ pursuant to section 232(d) – Sifris J held that section 232(d) is separate and distinct from section 232(e) and a breach may not necessarily involve commercial unfairness. The court must look at all of the relevant facts and circumstances to determine whether the conduct is in the best interest of the company as a whole, apart from its members. In this context, breaches of duty (whether statutory or fiduciary) by directors may well be conduct that is not in the best interests of the company as a whole, but where there is consent or ratification of such conduct (particularly in small family companies, where the directors and shareholders are the same), it may not be contrary to the interests of members as a whole or indeed unfair;
- what constitutes conduct oppressive to, unfairly prejudicial or unfairly discriminatory against a member pursuant to section 232(e) – Sifris J held that the critical issue is commercial unfairness, judged objectively, which usually results in some harm or prejudice by some conduct that is not reasonably or commercially justifiable. However, upon examination of all of the facts and circumstances relevant to each particular case, conduct that may appear unfair may be fully justified; and
- whether the applicant’s conduct is relevant to the alleged oppressive conduct of the defendant – Sifris J held that the conduct of the appellant may well be a relevant, and in some cases most relevant, factor in determining the nature and extent of any relief.
In refusing to grant Ian’s request for the Extons Group companies to be wound up, Sifris J held that:
- Ian was acting unreasonably in seeking winding up orders where there was an alternative remedy available to the parties (ie a buy –out at a price to be determined) which was desired by both parties with the only issue being one of price. However Sifris J noted that the position may change and it may be appropriate to revisit the appropriate relief, including, potentially, winding up orders;
- courts are extremely reluctant to wind up a solvent company (due to potential adverse impact on employees); and
- Ian did not have clean hands (although this was not a determinative factor).