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‘Just and Equitable’ Winding Up Of Solvent Companies

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By Alicia Hill, Principal, MST Lawyers and Benjamin Caddaye, Law Clerk, MST Lawyers.

As of May 2018, there were approximately 2,598,541 registered companies in Australia. The vast majority of these businesses (around 90%) fall into the category of a small business. Accounting for 33% of GDP, small corporate entities are vital to the national economy. However, due to their small scale, it is often the case that these small entities only have one or two shareholders, which can create difficulties when conflict arises between shareholders who have an equal stake in a company.

This situation arose in the case of Posgate & Anor v Hanson & Anor [2018] QSC 51. The Court had to determine whether a breakdown in the relationship between two equal shareholders was enough to justify the winding up of an otherwise profitable company.

The dispute in Postgate & Anor v Hanson & Anor

Mr Posgate and Mr Hanson each owned a 50% share of three companies:

  • Inspection Apps, a business involved in cloud-based inspection management and report generation services;
  • Workflow Technologies, held the patent relevant to Inspection Apps’ business; and
  • Mypoolinspections, an online tool to book pool fence inspections.

Before the dispute arose, the two men had operated these businesses together collaboratively. Mr Posgate spent most of his time working in the Mypoolinspections business and Mr Hanson in Inspection Apps. Mr Posgate took a modest salary of $55,000 per annum and Mr Hanson $24,000. These amounts reflected a sacrifice of short-term profit to grow the businesses in the long-term.

However, in early 2016 Mr Posgate decided to move from Cairns in Queensland (where the two men lived) to Western Australia (WA), taking up a job in a tug boat business. Mr Posgate had told Mr Hanson that he was enticed to move by a promised salary of $250,000. The decision had a disastrous effect on the Mypoolinspections business, as it was not possible for Mr Posgate to spend the time he had previously on the business now that he was in WA.

Following Mr Posgate’s decision to move away, Mr Hanson sought to increase his salary from the $24,000 he had received to an increased $150,000, reflecting the fact that he was now the only one working on the businesses they jointly owned. Mr Hanson called a directors’ meeting, where over skype he informed Mr Posgate that he wanted $254,523 per annum plus superannuation and certain bonuses. Unsurprisingly, Mr Posgate disagreed with the proposed 10 fold increase in salary and requested that Mr Hanson provide him information regarding the salaries of those in similar roles in Cairns, so he could determine what an appropriate salary was.

The dispute over salary continued, with Mr Posgate remaining unsatisfied by the requested financial information and with assurances not being provided by Mr Hanson. Two more directors’ meetings over the next year failed to resolve the issue. The relationship between the two partners continued to deteriorate, with Mypoolinspections entering into receivership in February 2017.

The winding up application

It was at this point in early 2017 that the dispute turned to litigation, with solicitors engaged by both sides. Mr Hanson wanted the resolve the remuneration issue by a buyout of Mr Posgate and threatened Court action if Mr Posgate did not comply.

Mr Posgate responded to this, holding that due to the foreshadowed court action and the continued failure to resolve the remuneration dispute, the two were in a deadlock. Mr Posgate’s letter suggested that he was open to a buyout, but would bring an application to wind up Inspection Apps if Mr Hanson initiated Court proceedings or failed to resolve the remuneration issue. After receiving no reply to this letter, Mr Posgate initiated proceedings under s 461 of the Corporations Act for an equitable winding up of the company.

‘Just and Equitable’ winding up

Section 461(1)(k) of the Corporations Act enables the Court to wind up a company if it believes it is ‘just and equitable’ to do so. This provision is commonly used in situations where a minority shareholder is facing oppressive conduct from a majority shareholder.

It can also be used where there is a quasi-partnership, like with Mr Posgate and Mr Hanson, where there are equal shareholders, and the continued operation of the business requires trust and cooperation between them.

The Courts have consistently noted that an order winding up a company is a last resort, particularly in a situation where the company is otherwise trading profitably. An important caveat on the ability of an Applicant to obtain an equitable winding up is found s 467.

Under s 467(4), the Court must make an order for winding up if it is of the opinion that the Applicant is entitled to (such an outcome) in the absence of any other remedy and the Applicant is not being unreasonable in pursuing the winding up instead of that other remedy.

Mr Posgate’s application

The Court in Mr Posgate’s case found that he had established on the face of the evidence an entitlement to the order for winding up. Despite the fact that the company was trading profitably, it was accepted that it could not continue to operate with the ongoing estrangement between the two men. It was at this point where s 476(4) became relevant. The Court had to determine whether there was some other remedy available to Mr Posgate in the place of the winding up and if there was, whether he was being unreasonable in pursuing the winding up instead.

This returned the Court’s attention to the offer made by Mr Hanson to buy out Mr Posgate’s shares. Mr Hanson had made offers to Mr Posgate in May and in November of 2017 to purchase his shares. The valuation was to be conducted through an independent valuation that would be binding on both parties. The Court concluded on an objective assessment of the evidence that the offer made in March was fair and reasonable, and therefore Mr Posgate had acted unreasonably in pursuing the winding up.

The consequence of this finding was to bar the making of a winding up order. Mr Posgate’s lawyers made several arguments as to why Mr Posgate had not acted unreasonably in ignoring the remedy of a buyout. These objections related to the cost and time required to have his shareholding valued.

However, all of these objections were rejected by the Court.  Henry J held that it could not be said that the cost and time required for an assessment of the shares justified the pursuit of the winding up when compared to the probable cost and time required for the company to be wound up. The Court, therefore, dismissed the application on the condition that Mr Hanson’s later November offer was still open for acceptance by Mr Posgate.

Consequences for future applications

The relationship breakdown between Mr Posgate and Mr Hanson is not confined to the periphery of commercial disputes. It was a commonplace disagreement between two shareholders. The spiral of the dispute to Court proceedings does, however, provide guidance to others that encounter a similar deadlock. The Court in Posgate & Anor v Hanson & Anor illustrated that they would not be willing to entertain the winding up of a profitable company if the party seeking the order had turned their back on a reasonable alternative.

It is therefore important that a party seeking a winding up ensure that they consider other options put to them, and upon a party fighting such an order to ensure they provide a genuine alternative to winding up.

If you have any questions about this article or the issues raised by it, please feel free to contact Alicia Hill by email, or phone +61 3 8540 0200.